Market Briefing: JPY FX market jolt

• JPY jump. Sizeable drop in USD/JPY, reportedly due to intervention. This has weighed on the USD & pushed AUD up to levels last traded in mid-June.

• Market pulse. BoJ meets today. Could it deliver a surprise hike? BoE kept rates steady overnight. US GDP underwhelmed but underlying detail was solid.

Global Trends

• A flurry of excitement across markets overnight with FX in the spotlight. The USD has been under pressure with a bit more of a reaction to yesterday’s ‘on hold’ US Fed decision compounded by moves in the JPY. USD/JPY (the second most traded currency pair) has dropped by ~2.5% with Japanese officials reportedly stepping back into markets to prop up the undervalued JPY and/or create more two-way risk in a currency that has weakened substantially over recent months. The moves washed through other currencies with EUR (now ~$1.1528) rising, the NZD jumping by almost ~1.5% (now ~$0.5880), and the AUD increasing to levels last traded in mid-June (now ~$0.7028).

• If/when confirmed, this would be the first time Japanese officials have intervened since April, with it only occurring a few times over the past ~5-years. Intervening to strengthen a currency needs to be tactical with the ability to step into this side of the market constrained by the size of the nations FX reserves war chest. Japan has ~US$1.1 trillion in foreign currency reserves. A sizeable amount, however, in the context of daily turnover it isn’t that much (on average ~US$125bn is traded in JPY in spot markets each day). However, irregular moves that aren’t telegraphed may help reduce speculative trading which has been one of the drivers behind the JPY weakness. Will the impact of the overnight moves last? Time will tell, but in the past we would note that bouts of FX intervention have tended to occur in batches. Moreover, the Bank of Japan meets today (no set time for announcement). Given Japan’s underlying inflation pulse, which has been added to by the weaker JPY, it is a matter of when, not if, the BoJ hikes interest rates further. There is a chance it occurs today, which if realised could boost the JPY further, and in turn exert more downward pressure on the USD, in our view.

• Elsewhere, US equities rose strongly with the tech-focused NASDAQ outperforming (+2.8%) the broader S&P500 (+1.7%) on the back of a recovery in semiconductor and IT stocks. The steepening in the US yield curve following yesterday’s Fed meeting continued with slightly larger falls in front end rates coming through. In commodities oil prices eased (brent crude -1.4%) and gold ticked up. Macro-wise, the Bank of England kept rates steady at 3.75% in a 6-3 vote. Notably, none of the six who voted to hold rates appear close to voting for a hike, at least based on comments from BoE Governor Bailey. On the data front, Eurozone GDP rose a stronger-than-expected 0.4%qoq in Q2, while at the same time US Q2 GDP underwhelmed with the economy expanding at a 1.5% annualised pace. However, some of that was due to net exports and inventories. Private sector activity was solid, indicating that underlying momentum across the parts of the US economy that generate jobs is improving.

Global event radar: BoJ (Today), China PMI (Today), EZ CPI (Tonight)

Trans-Tasman Zone

• The JPY driven moves across FX markets overnight, which have weighed on the USD (given USD/JPY is the second most traded currency) have indirectly helped propel the NZD and AUD higher (see above). At ~$0.5880 the NZD is back up where it was trading in early-June while the AUD (now ~$0.7028) is around levels last traded ~6-weeks ago. The AUD has been more mixed on the cross-rates with gains coming through against the EUR (+0.5%), GBP (+0.3%) and CNH (+0.9%) offset by a modest dip versus the NZD (-0.4%) and a larger fall relative to the JPY (-1.2%). That said, at ~112.18 AUD/JPY is still at lofty heights and in a region seldom traded the past few decades.

• As indicated previously, we think AUD/JPY (as well as USD/JPY) is very stretched compared to underlying drivers such as yield spreads, and that over the medium-term there are uneven risks (i.e. a higher chance of a sizeable move down compared to a further increase). As our chart illustrates, AUD/USD and USD/JPY have a somewhat inverse relationship. Hence, further falls in USD/JPY stemming from another bout of FX intervention by Japanese officials and/or a surprise interest rate hike by the Bank of Japan today (no set time for decision) could give the AUD more of a helping hand in the short-term.

• However, we also feel there is a limit to how far the AUD can lift in the near-term, and that it is still facing headwinds over the weeks ahead. On the back of the softer than predicted Australian CPI markets have shifted towards no change by the RBA in August (it is now only viewed as a ~3% chance), while only ~16bps of further tightening is factored in by next February. We agree, and as discussed before, we believe the RBA is closer to the end (if not already there) than the beginning of its tightening cycle given the unfolding slowdown in the Australian economy. Concerns about the domestic growth outlook, combined with the swing in relative yield spreads and the potential for more volatility in asset markets because of geopolitics and/or valuation worries, could drag on the AUD over the period ahead, in our view. This would coincide with seasonal pressures the AUD tends to face at this time of year. Since the mid-80’s AUD/USD has declined in August ~60% of the time. It is even higher for cross-rates like AUD/EUR (~70%), AUD/JPY (~62%), and AUD/CNH (~64%).

AUD & NZD event radar: BoJ (Today), China PMI (Today), EZ CPI (Tonight)

AUD levels to watch (support / resistance): 0.6950, 0.6980 / 0.7050, 0.7080

NZD levels to watch (support / resistance): 0.5810, 0.5840 / 0.5900, 0.5930

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

FRIDAY (31st July)

JPY BoJ Decision (no set time)

JPY Tokyo CPI Inflation (July) (9:30am)

JPY Industrial Production (June P) (9:50am)

CNY PMIs (July) (11:30am)

EUR France CPI Inflation (July P) (4:45pm)

EUR CPI Inflation (July P) (7pm)

USD Employment Cost Index (Q2) (10:30pm)

USD Chicago PMI (July) (11:45pm)

*Note, all times/dates provided are AEST