Forex News

• USD/JPY comes under some selling pressure and is weighed down by a combination of factors.
• Japan’s National CPI report reaffirms BoJ rate hike bets and provides a modest lift to the JPY.
• Receding Fed hike bets undermine the USD, though geopolitical risks could limit deeper losses.

The USD/JPY pair struggles to capitalize on the previous day's recovery from the 158.00 mark, or a one-and-a-half-week low, and meets with fresh supply on Friday. Spot prices stick to modest intraday losses around the 158.60 area through the first half of the European session and remain on track to end in the red for the first time in three weeks.

The Japanese Yen (JPY) gets a minor lift after domestic data showed that core consumer inflation accelerated during July, bolstering the case for an interest rate hike by the Bank of Japan (BoJ). In fact, the core Consumer Price Index (CPI), excluding fresh food items, rose 1.8% YoY in July, up from a 1.6% advance in the previous month and marking the fastest pace since January. Adding to this, an index that strips out both volatile fresh food and fuel prices, which is closely watched by the BoJ as a clearer ‌gauge of underlying inflation, rose 1.9% from a year earlier after a 1.7% gain in June. This, along with the prevailing US Dollar (USD) selling bias, exerts some downward pressure on the USD/JPY pair.

In fact, the USD Index (DXY), which tracks the Greenback against a basket of currencies, languishes near its lowest level since May 14 as traders have been trimming their bets for an immediate interest rate hike by the US Federal Reserve (Fed). However, markets are still assigning around a 68% chance that the US central bank will raise borrowing costs by the end of this year amid inflation risks stemming from higher oil prices. Moreover, minutes from the July 28-29 FOMC meeting revealed on Wednesday that officials indicated the need to raise interest rates soon unless there was more progress on bringing down inflation. This, along with geopolitical uncertainties, supports the USD and the USD/JPY pair.

Furthermore, the wide US-Japan interest rate gap and growing concerns about Japan's worsening fiscal condition might hold back JPY bulls from placing aggressive bets. Hence, it will be prudent to wait for strong follow-through selling before confirming that the recent goodish recovery from the 155.25-155.20 area, or the lowest since May, touched earlier this month, has run out of steam and positioning for further losses. Traders now look forward to the release of flash US PMIs for some impetus, while further developments surrounding the Middle East crisis might also contribute to producing short-term trading opportunities around the USD/JPY pair.

BNY’s David Tam stresses that while the Federal Reserve retains legal capacity to support corporate credit, the current Warsh Fed is unlikely to repeat Covid‑era interventions. He sees no immediate alarm, with tight spreads and solid demand, but warns that in a future selloff investors cannot rely on dealers or the Fed to quickly contain a sharp widening in credit spreads.

Warsh Fed seen reluctant to intervene

"The Fed has the legal authority and institutional capacity to intervene in the event of a truly disorderly widening of credit spreads. During the early days of Covid, the Fed set up the Primary Market Corporate Credit Facility (PMCCF) and Secondary Market Corporate Credit Facility (SMCCF). The PMCCF ultimately saw no take-up while the SMCCF only saw $14bn, well below the headline capacity, but the programs are often credited with narrowing spreads through an announcement effect."

"Critics of the Covid interventions respond, however, that the PMCCF, SMCCF and other Fed programs increased moral hazard. Our view is that the bar is extremely high for the Warsh Fed to intervene in private markets to address a widening of credit spreads in the way that the Fed has in the past. The Warsh Fed is more likely to view such an event as a localized crisis or an opportunity to impose discipline in a market that has enjoyed almost 20 years of a more interventionist Fed."

"To be clear, we see no immediate cause for alarm. At least at the moment, Bid-Ask spreads remain narrow, dealers are structurally short IG credit, end investor demand appears to be holding up, and spreads remain near their tightest levels. But investors should be aware that in the event of a selloff, some of the typical circuit breakers, a marginal end investor ready to step in, the dealer community, or the Fed might not be as willing or able to contain a gap wider in spreads."

"As dealers are the first line of defense in a selloff, keep an eye on dealer net positioning and total fails. Dealer positioning moving more toward neutral or even net long might suggest greater balance sheet constraints and a continued rise in fails could suggest intermediation frictions."

"Keep an eye both on spreads and on long-end yields. A widening in credit spreads might suggest that investor sentiment is cooling, while a decline in long-end yields might make the value proposition less compelling."

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

Commerzbank’s Tatha Ghose highlights growing challenges for Polish policymakers, citing stretched fiscal plans and accelerating underlying inflation. PPI and wage growth have picked up sharply since the Iran war, leading him to argue that further National Bank of Poland rate cuts should be ruled out. With NBP likely to stay non-committal, this backdrop is seen as negative for the Zloty.

Fiscal strain and inflation curb rate-cut hopes

"Developments in the Polish economy are turning less comfortable for monetary policymakers. We can cite two areas: 1) the fiscal situation and 2) underlying inflation dynamics."

"Moving on to inflation news: PPI inflation accelerated to 2.8%y/y in July from 1.9%y/y in June, faster than the 2.5% consensus. This is consistent with the broader energy and commodity shock story: renewed US-Iran hostilities pushed oil and natural gas prices higher, and the outlook for August is poor because oil prices have continued to rise."

"As usual, the year-on-year picture is not reliable: on our preferred seasonally-adjusted month-on-month basis, inflation drivers such as PPI and wages are notably accelerating; PPI has reversed from being deflationary to sharply inflationary since the start of the Iran war."

"This should rule out further rate cuts by Poland’s National Bank (NBP) for the foreseeable future – NBP governor Adam Glapinski’s earlier indication that rate cuts may soon follow should now be treated as obsolete information."

"Assuming that NBP will at best stay non-committal about future rate moves, the development is negative for the zloty because inflation data are accelerating faster than NBP is likely to turn hawkish."

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

The United Kingdom (UK) S&P Global Composite Purchasing Managers' Index (PMI) expanded surprisingly at a faster pace to 52.5 in August due to robust service sector activity. The Composite PMI was expected to arrive lower at 51.6 from 52.2 in July.

The Service PMI also expanded unexpectedly at a faster pace to 52.8 from the previous reading of 52.1. The data was expected to come in lower at 51.8. Meanwhile, the Manufacturing PMI dropped to 51.5, as expected, from 51.9 in July.

Market reaction

A slight upside move is seen in the British Pound (GBP) against the US Dollar (USD) after the data release. However, this appears to be the outcome of a downside move in the US Dollar. As of writing, GBP/USD trades 0.15% higher to near 1.3650.

United Overseas Bank’s (UOB) Quek Ser Leang notes USD/JPY at 159.00 rebounded sharply from 158.00, but now looks set to trade between 158.50 and 159.35 intraday. For the next 1–3 weeks, he maintains a slightly negative view, expecting the pair to edge lower within a 156.60–159.60 range, while longer-term charts still allow for an extended advance above the 21-day EMA.

Short-term softness within broad range

"24-HOUR VIEW: On Monday, USD plunged to a low of 158.03. Yesterday, we highlighted that “the sharp decline appears overdone, and while USD could drop below 158.00, any decline is likely part of a lower range of 157.70/158.70 rather than a sustained decline.” The subsequent price movements did not unfold as expected. USD dipped to 158.00 and then rebounded strongly to close at 159.05 (+0.56%). This time around, the rebound appears to be overdone, and instead of continuing to rebound, USD is more likely to trade in a range between 158.50 and 159.35."

"1-3 WEEKS VIEW: We revised our USD view to slightly negative yesterday (19 Aug, spot at 158.30). We highlighted that “downward momentum is starting to build, but it is insufficient for a sustained decline.” We also highlighted that USD “could edge lower, but any decline should be contained within a 156.60/159.60 range.” We did not expect the subsequent strong rebound that reached a high of 159.18. Although the build-up in downward momentum is fading, we will continue to hold the same view for now."

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

• EUR/USD steadies just below three-month highs at 1.1710, on track for a 1% weekly rally.
• Eurozone Flash HCOB PMI's beat expectations in July, while German PMIs showed a mixed picture.
• The US Dollar remains depressed amid the US Treasury's plan to boost bond buybacks.

The Euro (EUR) is trading a few pips below 1.1700 against a depressed US Dollar (USD) on Friday, on track for a more than 1% weekly rally, and with the three-month high of 1.1710 at a short distance. Solid Eurozone business activity figures have improved confidence in the common currency, while the Greenback remains on its back foot since the US Treasury announced a plan to boost buybacks of long-term Treasuries on Wednesday.

Eurozone July’s Flash HCOB Purchasing Managers’ Index (PMI) data revealed that Manufacturing activity accelerated to 52.8 from 51.9 in June against expectations of a mild decline to 51.8. Services activity has remained unchanged, at 51.7, also above the market consensus, which had anticipated a moderate slowdown to 51.5.

Previously, German PMI figures had displayed a mixed picture. Services activity accelerated its contraction to 48.5 in July from 49.8 in June, against expectations of an improvement to 50.1. Manufacturing PMI, on the other hand, rose to a 51-month high of 54.1, from 52.2 in June, beating market expectations of a slight deceleration to 52.0.

US Treasury’s bond buyback plans are weighing on the USD

The US Dollar, on the other hand, remains on the defensive, following the US Treasury’s plan to boost buybacks of long-term Government Bonds, aimed at stemming a sharp rally in yields. The yield for the 30-year Treasury note hit fresh 19-year highs at 5.33% earlier this week, as news that national debt had topped USD 40 trillion prompted bondholders to demand higher compensation.

Strategists at Scotiabank argue that “the Treasury is trying to manage longer-term rates—which have been rising because markets are questioning the Fed’s commitment to inflation fighting and investors are worried about the sustainability of US fiscal policy.” In their view, if higher yields are unable to “fully take the strain from those concerns, the USD will have to,” leaving the Dollar vulnerable as investors reassess both the policy outlook and the fiscal backdrop.

MUFG’s Derek Halpenny sees a tension between aggressive Reserve Bank of New Zealand (RBNZ) tightening expectations and increasingly stretched short positioning in the New Zealand Dollar (NZD). While softer labour-market conditions cast doubt on nearly 100bps of tightening priced over the next year, the bank argues that bearish NZD positioning may already be extreme. A more attractive Australian yield profile continues to favour AUD/NZD, although potential El Niño-related terms-of-trade support could limit further NZD downside.

RBNZ doubts versus stretched NZD shorts

"The weekly IMM positioning data is a data series tracked by many without necessarily throwing out a strong message but the positioning for the New Zealand dollar is definitely worth highlighting. The latest data, to the week ending 11th August, revealed Leveraged Funds’ total short position had hit a record in the series of the data going back to 2006."

"On a year-to-date basis NZD is actually the third best performing G10 currency after NOK and AUD. The RBNZ policy rate currently stand at 2.50% but the OIS curve implies expectations of nearly 100bps of tightening over the next 12mths."

"The positioning could also reflect scepticism over the ability of the RBNZ to deliver 100bps of tightening over the next year. The labour market showed the unemployment rate increased from 5.4% to 5.6% despite a strong increase in employment highlighting increased labour supply and greater economic slack than assumed."

"We would certainly concur with the view that the OIS curve for the RBA may be underpriced (less than one hike priced over 12mths) and the RBNZ pricing is too aggressive. The positive AUD angle also incorporates energy and Middle East risks are more a benefit for AUD than NZD."

"While 100bps of tightening may prove excessive, the scale of short NZD positioning looks more extreme and we would argue at this level, the bar is relatively high for a notable leg lower for NZD. We should also be mindful of a potential flip in the terms of trade bias. The El Nino risks point to clear upside potential for food inflation over the coming 6mths and that could provide NZD with a positive terms of trade lift."

"Finally, the positioning may well reflect a bilateral view versus AUD. The AUD/NZD cross is key for NZD and there remains a far more attractive yield pick-up in Australia with the RBA continuing to communicate a relatively hawkish message on the potential for another rate hike."

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