USD/JPY: Intervention risks grow as yen falls to 11-month low

Bank of Japan Governor Kazuo Ueda and his deputy governor Uchida are committed to their ultra-easy policy.  Governor Ueda noted that there was “very high uncertainty” over whether companies would continue to increase prices and wages.  Uchida stated that the central bank needs to patiently continue monetary easing.  He also reiterated that they are closely watching FX markets.

Bond Yields on the Rise

FX: EUR/USD broke below 1.06 for the first time since mid-March. Meanwhile, USD/JPY is closing in on the highs of October last year as US yields continue to climb. The SEK defied the shaky risk sentiment and traded strong on the back of the Riksbank starting their hedging program, with EUR/SEK briefly below 11.70 on the day. EUR/GBP traded above 0.87 for the first time since March as markets continue to digest the BoE disappointment last week.

Core Bonds Fell Off a Cliff

Core bonds fell off a cliff with the long end again underperforming. The move was natural, not driven by any particular event and that makes it so telling. Some technical breaks did reinforce it though. The German 10y yield surpassed the previous cycle high at 2.77% and temporarily moved above 2.8% for the first time since 2011.

Crypto Market Losing Ground But Slowly

The positive correlation between cryptocurrencies and the stock market is temporarily back on track. The crypto market capitalisation approached 1.05 trillion (+0.9% in 24 hours). On Monday evening, the crypto market recouped its losses following the US stock indices, but since Tuesday morning, there has been renewed selling strength. This time amid pressure on Chinese stocks.

After Hawkish Fed, Dollar Turns to Core PCE Inflation

The Fed decided to keep rates steady last week, but policymakers appeared in hawkish armor, projecting a higher rate path than back in June. The new dot plot continued pointing to another quarter point hike by the end of this year, but only to two rate cuts during 2024. More specifically, officials now see rates coming down to 5.1%, 50bps higher than June’s 4.6% projection.

Yen Falls to 11-month Low, 150 Next?

The Bank of Japan maintained its policy settings on Friday, which really should not have been all that surprising, given the dovish messages that BoJ Governor Ueda and other BoJ members have been sending out for weeks. The BoJ does not appear to be in any rush to phase out its ultra-loose stimulus, given the weakness in Japan’s economy. Domestic consumption remains weak and the slowdown in the global economy is hurting the critical export sector.

Sunset Market Commentary

It seemed at first that today was going to be a repeat of yesterday at the start of the European session, be it in less dramatic fashion. Both US and German yields eked out a few more basis points at first. But momentum dwindled after stock markets opened and in no time stacked losses of up to 1.3%.

Gold Decouples from Interest Rates, What's Next?

Gold continues to trade with impressive resilience. Even though conditions in financial markets have turned against the precious metal in recent months, gold prices have not absorbed much damage, defying the negative pressure exerted by soaring interest rates and an appreciating US dollar.

Euro Slips to 6.5-Month Low, Lagarde Dismisses Rate Cuts

ECB President Lagarde said on Monday that interest rates would be “set at sufficiently restrictive levels for as long as necessary”, adding that the ECB was in a long race in the battle to bring down inflation to the 2% target. Lagarde stated categorically that the Governing Council was not considering rate cuts.

All Eyes on FOMC Dot Plot

Today's main event will be the FOMC meeting where we expect no changes in policy rate, in line with consensus. The focus will instead be on the updated dot plot, i.e. how the policymakers see the future rate path.