Written by Convera’s Market Insights Team
Adjustment for intervention risk
George Bessey – Chief FX Strategist
The Japanese Yen, which accounts for roughly 14% of the US Dollar Index, continues to be in the spotlight. USD/JPY rose above 160 yen yesterday, hitting its highest level since 1986 and raising warnings of intervention. The last time it briefly dipped below this level was in late April, when the Bank of Japan (BoJ) intervened and USD/JPY appears to have closed 1.3% lower, but this time things may be different.
This time, the risk of intervention is low, as the yen’s depreciation has been contained and overall exchange rate fluctuations have also been contained. The one-week realized volatility of USD/JPY is around 4.50%, far below the level seen when Japanese authorities usually intervene. That said, Masato Kanda, chairman of Japan’s Monetary Policy Committee, said yesterday that the authorities are closely watching the market with great urgency and will take appropriate measures if necessary. But even if the BOJ sells the dollar, any pullback in the currency pair could be much shallower than before, as options market pricing shows. Options market pricing suggests that the one-week risk reversal is the least bearish for the USD in three months, suggesting that there is no rush to hedge against a drop through intervention.
The yen has fallen about 1.5% against the dollar since the start of June, widening its decline this year to about 13%, under pressure from diverging monetary policies between the Bank of Japan and the Federal Reserve. The dollar index rose to 105.8 on Wednesday, its highest level in nearly two months. Traders are digesting comments from Fed officials and pushing monetary outlooks as they await Friday’s headline PCE inflation number.
Mixed data complicates BoE outlook
George Bessey – Chief FX Strategist
The pound rose across the board this morning after UK companies raised wages in job ads at the fastest pace since January, according to Indeed data, another factor that could complicate the case for an August interest rate cut by the Bank of England (BoE).
Salaries listed on the Indeed job search site rose 6.5% in the year to May, partly due to a 9.8% increase in the minimum wage in April, but also reflecting worker shortages since the pandemic. These figures provide the latest snapshot of labour market developments, which the Bank of England is closely monitoring for signs of upward price pressures. Policymakers have said wage growth is still too fast to be compatible with the UK’s 2% inflation target, an issue that could keep borrowing costs at their 16-year high for a little longer. Financial markets are still pricing in a 15 basis point easing in August, which equates to a 60% chance, but we think the Bank of England is likely to cut rates then, although today’s data and stiffness in the core and services inflation numbers complicate matters. The UK election is over, economic activity is losing steam and consumer spending is softening, as evidenced by yesterday’s weaker-than-expected monthly retail sales balance from the Confederation of British Industry (CBI).
For now, in this low volatility environment, the Pound remains an attractive currency due to its high-yielding advantage, especially versus the Euro, Japanese Yen, Swiss Franc, etc. As for GBP/USD, the pair is hovering at $1.26 but is below its 50-day and 100-day moving averages, signaling an increasing likelihood of further declines.
Risk aversion holds back euro recovery
Ruta Pryskienite – Chief FX Strategist
The euro fell to a two-month low of $1.0687 after ECB Governing Council member Olli Rehn signaled he was leaning toward further easing this year. Deteriorating risk sentiment sent European stocks lower and pushed the European government bond yield curve higher in line with the global trend. The spread between OATs and German bunds rose to 76.8 basis points, putting further pressure on the common currency.
The euro was already under pressure early in Wednesday’s trading session as the latest survey showed German consumer sentiment unexpectedly weakened for the first time in five months. The GfK Consumer Sentiment Index fell to -21.8 for July from a previous reading of -21.0, well below the market consensus of -18.9. Income expectations and economic outlook both dropped significantly. As a result, savings propensity surged, while purchasing propensity remained sluggish. The report marks the third below-expectation survey this month, suggesting a bumpy road to recovery. Despite the headwinds, we continue to expect the German economy to emerge from stagflationary conditions in the second half of the year.
Across the FX market, the Japanese Yen has fallen to a record high of 171.60 yen against the Euro, raising fresh concerns over possible further intervention by Japanese authorities to support the struggling exchange rate. Today’s US jobless claims figures and the US presidential debate could move markets towards Friday’s PCE report and Sunday’s French election vote. Entering the final stretch of the week, EUR/USD is trading at the lower end of its one-month trading range. With near-term risks skewed to the downside, continued weakness in the Euro could see EUR/USD test the April lows near $1.0620.
Yen hits multi-year low against other currencies
Table: 7-day currency trends and trading ranges
Major Global Risk Events
Calendar: June 24th to 28th
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*Published FX rates are provided by Convera’s Market Insights team for research purposes only. Rates are based on proprietary sources and may not match live exchange rates displayed on other sites. They do not represent actual buying or selling rates or financial offers.
