USD strength continues as FX volatility rises
Headlines
*Japan’s yen propped up after intervention, dollar powers through
*Stocks slump to two-year low as rates reality bites
*UK consumer confidence falls to record low, Finance Minister to reveal plans
*Oil prices edge down on recession fears, gold consolidates near lows
USD suffered a wild day eventually closing marginally lower. EUR traded to an intraday low of 0.9806 before finishing little changed. GBP made more new 37-year lows at 1.1211 and has broken through 1.12 today. USD/JPY traded as high as 145.90 after the BoJ announcement. But intervention sent the yen plunging to 140.36 before ending at 142.32. AUD spiked down to 0.6573 and USD/CAD up to 1.3544.
US equities finished lower again after the flurry of central bank hikes hurt investor sentiment. Tech companies took the brunt of the selling with the Nasdaq 100 losing 1.17%. Growth stocks are more sensitive to changes in borrowing costs. Asian stocks are negative, not helped by the closure of the Nikkei 225 due to a public holiday. Both European and US futures are pointing to a lacklustre open.
Market Thoughts – “A Day for the ages”
Sometimes, we build sessions up as being super volatile and they flatter to deceive. But “Central Bank Super Thursday” didn’t disappoint. The flood of interest rates rises (except Japan) raised fears that the battle to control rising inflation could bring a recession. We also had the small matter of Japanese FX intervention, for the first time since 1998.
An underlying bid to the US dollar should remain. Even so, it’s worth highlighting how widespread policymakers’ views are across the globe. By the end of 2024, Fed officials expect rates to be somewhere between 2.5% and 4.5%. Yesterday, the Bank of England’s rate-setting committee, the MPC, were split three ways over what rate hike they wanted. (We won’t go into the clash between monetary and fiscal policy!) And in Japan, the BoJ is stuck between defending its uber-dovish policy stance while the Ministry of Finance tries to curb the yen freefall with intervention. Differences in policies make for higher volatility and potential policy accidents.
Chart of the Day – USD/JPY back in the range
Yesterday’s historic intervention in the yen came after several rounds of warnings and many big figures later. For now at least, it has slowed the dollar bull trend. The authorities were forced into “decisive action” with yen down over 19% versus the dollar this year. But they could be battling with FX markets for some time as we enter a volatile 140-145 range in USD/JPY.
Fundamental gaps between negative interest rates in Japan and rising US Treasury rates heading above 4% are the major reason for 24-year highs in USD/JPY. But unilateral intervention by Japan rarely works. The BoJ did actually note at yesterday’s meeting that underlying inflationary pressures are building. Ultimately, a long-term trend change in this major needs the BoJ to change monetary policy.
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