Forex News

Nordea’s Helge J. Pedersen argues that the Japanese Yen appears significantly undervalued versus the Dollar on both OECD purchasing power parity estimates and The Economist’s Big Mac Index. Despite Japan’s strong trade and current account surpluses suggesting room for Yen appreciation, persistently low Japanese interest rates versus the US continue to weigh on JPY and limit sustained currency strength.

Yen undervaluation versus Dollar highlighted

"It is not every day that the US and Japan join forces in the currency market to strengthen the yen. But that is exactly what happened in late July, after the Japanese currency had approached its lowest level in nearly four decades. The intervention worked – but only briefly."

"This is an analysis where economists traditionally look at the so-called purchasing power parity (PPP) exchange rate – the rate at which an identical basket of goods in Japan and the US would cost exactly the same. This is a rate that the OECD, among others, attempts to calculate on an annual basis, and the latest figures suggest that the yen is significantly undervalued."

"And in this year's edition, the message is very clear: Asian currencies, and the yen in particular, look cheap against the dollar. The weakening of the yen has in fact been so dramatic that a Big Mac in Japan is now markedly cheaper than in China, measured in dollars."

"Since Japan runs a large trade surplus with the US and a considerable current account surplus more broadly, all of this points to strong competitiveness – and suggests that a strengthening of the currency should be well within reach."

"And unless the interest rate gap narrows – for example through further monetary tightening by the Bank of Japan – this dynamic will persist, with ever-cheaper Japanese burgers as a consequence."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• XAG/USD hits session highs above $70.00, on track to close a four-week rally.
• The focus on Friday is on Fed Warsh's speech at the Jackson Hole meeting.
• Silver bulls aim for the 200-day SMA, at $72.50.

Silver (XAG/USD) heads north for the second consecutive day on Friday, with all eyes on the Federal Reserve (Fed) Chairman Kevin Warsh’s speech at the Jackson Hole Symposium, due later on the day. The white metal extends gains to two-month highs a few cents below $71.00, after bouncing from the mid-range of the $67.00s on Thursday, on track to close a four-week rally.

Investors await Fed Warsh’s speech, eager for further insight about the central bank’s monetary policy, following the poor guidance provided at July’s monetary policy meeting. On Thursday, Kansas Fed President Jeffrey Schmidt and Cleveland Fed President Beth Hammack called for immediate monetary tightening, following hot US Personal Consumption Expenditures (PCE) Price Index figures the previous day.

Technical Analysis: Bulls aim for the 200-day SMA, at $72.50

XAG/USD trades at $70.44 with near-term price action showing a constructive bias from July's trough below $55.00. Momentum indicators in the daily chart remain within positive territory, with the Relative Strength Index (14) at 66 approaching, but not yet at overbought levels, and the Moving Average Convergence Divergence (MACD) highlighting moderate bullish traction.

Bulls are likely to meet resistance at the mid-June highs between $71.35 and $71.55 ahead of the key resistance area at the 200-day Simple Moving Average (SMA), a closely watched indicator in FX markets, which is now lying at $72.50. A break above there would open the way toward the June 4 high near $75.00.

On the downside, Thursday's low, at $67.63, is likely to provide support, ahead of a secondary floor near $63.25, which capped bears on August 18, and the August 6 low, near $60.90.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

United Overseas Bank’s (UOB) Quek Ser Leang and Lee Sue Ann highlight AUD/USD’s third consecutive daily gain, with the pair stalling just under the 0.7200 resistance. While momentum is showing negative divergence, they still see scope for a brief push above 0.7200, though not sustained or extending to 0.7220. On a one-to-three-week view, they see potential for a test of 0.7220 before pullback risks increase.

Uptrend slows but upside targets still in play

"24-HOUR VIEW: AUD edged up to within a couple of pips of the major resistance at 0.7200 yesterday, printing a high of 0.7198. AUD closed higher for the third straight day at 0.7194 (+0.31%). Despite posting fresh three-month highs, upward momentum is deteriorating, with momentum indicators showing negative divergence. That said, there is scope for AUD to rise above 0.7200. However, AUD is unlikely to maintain a foothold above this level. Any further advance is also unlikely to reach 0.7220. Support is at 0.7185; a breach of 0.7175 would indicate that the immediate upward pressure has eased."

"1-3 WEEKS VIEW: Last Thursday (19 Aug, spot at 0.7125), we highlighted that “while further AUD strength is not ruled out, it must first break clearly above 0.7150 before a move to 0.7175 can be expected.” After AUD broke clearly above 0.7150, we highlighted on Monday (24 Aug, spot at 0.7165) that “AUD strength remains intact, and the level to watch is 0.7200.” While AUD rose to a high of 0.7198 yesterday, upward momentum is deteriorating amid negative divergence on momentum indicators. However, as long as AUD holds above 0.7160 (‘strong support’ level previously at 0.7120), there is a chance for AUD to test 0.7220 before the risk of a pullback increases."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Silver prices (XAG/USD) rose on Friday, according to FXStreet data. Silver trades at $70.41 per troy ounce, up 1.68% from the $69.25 it cost on Thursday.

Silver prices have decreased by 0.94% since the beginning of the year.

The Gold/Silver ratio, which shows the number of ounces of Silver needed to equal the value of one ounce of Gold, stood at 65.38 on Friday, down from 66.44 on Thursday.

(An automation tool was used in creating this post.)

MUFG highlights that rising European natural gas prices are reviving inflation risks, which could push the Bank of England toward another rate hike and underpin the Pound. While crude Oil remains contained, UK natural gas futures have surged, and the bank notes that this divergence in energy dynamics may support both the Euro and Pound against peers.

Natural gas surge underpins BoE hike risk

"As we have highlighted this week, the natural gas backdrop in Europe is certainly pointing to upside inflation risks. Crude oil prices have been more contained but the UK natural gas front future price has gained 62.5% since the start of July and the close yesterday was the highest since January 2023 following the surge in price after the start of the Russia-Ukraine conflict."

"In the July Monetary Policy Report the BoE as always used the futures curve in a 15-day period to a certain date prior to the release (in July’s report it was 20th July) which basically had the natural gas futures prices peaking at a little over 123p in Q4 before declining to under 60p at the end of the forecast period."

"Still, the hawks on the MPC, like Catherine Mann, will no doubt highlight the energy-related inflation risks that have actually worsened and therefore makes it more difficult to ignore due to the offsetting weaker domestic economic conditions."

"For the BoE, the backdrop does not look as urgent and the data provides continued scope for the BoE to remain more patient than the ECB. Today’s panel topic does not suggest Catherine Mann will use this opportunity to provide an update on her monetary policy views but given her hawkish leanings any comment would likely focus on the potential need to act."

"A hike by the BoE is priced by year-end and that is looking more realistic given the natural gas price backdrop. The natural gas price moves in Europe will fuel divergence and provide support for the euro and pound."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Commerzbank’s Michael Pfister reviews EUR/USD options, noting that risk reversals turned positive again after comments by the US Treasury Secretary. He argues the earlier period of persistent positive EUR/USD risk reversals was likely an exception, and that the Euro tends to benefit whenever doubts over US policy resurface, a pattern reflected in current risk reversal pricing.

Risk reversals react to US policy signals

"Following the start of the war in Iran, risk reversals initially returned to their pre-Liberation Day levels. In other words, during periods of heightened volatility, the demand for hedging against further USD appreciation was apparently greater. This was likely due in part to the fact that the euro area was hit significantly harder by the disruption to oil and gas supplies."

"But the longer the conflict lasted - or once hostilities ended - the market moved towards slightly negative risk reversals (i.e. hedging against US dollar strength), amid very low implied volatility. Even this development was fundamentally consistent with the relationship prior to Liberation Day. Implied volatility was so low that market participants did not wish to hedge more strongly."

"It now seems reasonable to assume that the period from early April last year to the end of February was the exception rather than the rule – after all, we have consistently observed positive EUR/USD risk reversals."

"I suspect the situation is not quite so clear-cut, but depends on political signals from the US, although it is difficult to back up this assumption with data. But the past few days provide a clue: following the announcement by the US Treasury Secretary, risk reversals rose back into positive territory."

"Of course, six trading days' worth of data are too few to draw clear conclusions. The trend must therefore be monitored further over the coming weeks. Presumably, however, the foreign exchange market has not yet forgotten the uncertainty that followed Liberation Day. In other words, whenever there are sustained doubts about US policy, the euro is likely to benefit. And the risk reversals reflect precisely that."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)