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Yen plunge continues; UK inflation returns to double digits


Yen extends freefall as traders defy intervention warnings

Pound slides after UK inflation returns to double digits

Loonie traders await inflation numbers as well

Equities extend recovery on better earnings results

Intervention warnings intensify as dollar nears 150 yen

The US dollar traded slightly lower against most of the other major currencies on Tuesday but rebounded somewhat today. The only currencies against which the greenback gained some ground yesterday was the Japanese yen and the British pound, with the former getting closer to 150.00 per dollar, leaving traders on high alert for another intervention episode.

A breach above 145.00 about a month ago was enough for Japanese authorities to step in and try to support their currency, but the attempt was unsuccessful with dollar/yen resuming its uptrend within a few days. That said, Japanese officials have remained vocal since then, with the latest warning coming from finance minister Suzuki earlier today, who said that he was checking currency rates “meticulously” and more frequently.

Officials have been repeatedly saying that they are not defending a specific exchange rate level, but rather, they are monitoring the pace of the yen’s slide. However, looking at dollar/yen, that pace has not been particularly slower than it was before the first intervention episode, which makes the case for a repeat near the round figure of 150.00 more likely.

Nonetheless, another attempt may be destined to fail too, as interest rate differentials remain at the top of investors’ agenda. With the Fed raising rates aggressively and the BoJ stubbornly sticking to its ultra-loose strategy, dollar/yen traders may see intervention as an opportunity to buy again at better levels.

Accelerating UK inflation adds to recession concerns

The other currency that lost some ground against the greenback yesterday was the pound. Although sterling enjoyed decent gains on Monday due to Britain’s new finance minister Jeremy Hunt reversing most of the previously announced fiscal measures, traders may have locked some profits ahead of today’s UK inflation numbers.

Both the headline and core rates rose by more than anticipated, with the former entering double digits again. The fact that the underlying rate rose as well suggests inflation is becoming stickier and may have prompted investors to add to bets of a full percentage point hike at the BoE’s upcoming gathering on November 2. Indeed, the probability for such an action has risen to around 65% from around 60% yesterday.

The pound slid at the time of the release, confirming the narrative that traders are more concerned that bigger hikes by the BoE will only assist in dragging the UK economy into recession, rather than relieving their pockets from the pain of high consumer prices; and with the UK economy probably already shrinking during Q3, those fears are more than rational. In politics, there may be some calmness for now, but investors will still have to deal with the official announcement of the government’s fiscal plans on October 31. This combined with the desire of some Conservative lawmakers to submit letters of no confidence in the new prime minister, keeps some uncertainty on the table, and uncertainty is not good for a currency.

Canada’s inflation to slow further, allowing the BoC to ease hike pace

Later today, we have more inflation numbers coming out, this time from Canada. The headline and most of the underlying rates are expected to have declined further in September, which could add to speculation that the BoC may slow down their rate increases from here onwards, and thereby weigh on the Canadian dollar.

Although the BoC refrained from verifying such expectations at its latest gathering, the larger-than-expected slowdown in the August inflation prints has prompted market participants to scale back their bets. Currently, they largely anticipate a 50bps hike at the next gathering, and only two more quarter-point increments thereafter.

Equities trade in the green amid better earnings

Stocks extended their recovery yesterday, buoyed by the calmness in the UK political scene and the better-than-expected earnings results. After the US closing bell, Netflix beat its estimates, which suggests that some more recovery may be on the cards for today as well.

However, the latest rebound is far from implying a meaningful bullish reversal. After all, the global macro landscape has not changed much. Most major central banks are still tightening aggressively, risking a global recession, with the dollar remaining a major headwind to firms’ profitability. The fact that Treasury yields have not slid much yesterday adds more credence to the narrative that this is just a corrective phase within a broader downtrend.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-yen-plunge-continues-uk-inflation-returns-to-double-digits-168546
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