Japanese Yen Stays Top of Mind

Markets

The Japanese yen stays top of mind. BoJ deputy governor Himino and his boss Ueda triggered a scorching rally amid rising bets of an imminent (December 19) policy shift. USD/JPY fell from an open at 147.31 to an intraday low of 141.71. The pair eventually closed at 144.13 with strong support from the 200dMA (142.33) and the 38.2% retracement (142.48) on the 2023 advance for the time being a too tough nut to crack. JPY’s advance against the euro was equally impressive. The same technical references (resp. 154 and 154.4) came to the rescue, allowing EUR/JPY to pare 5.5 yen losses to 3 yen with a close at 155.58. JPY had a lot of momentum at the start of Tokyo dealings this morning but the rally again bumped into the above mentioned resistance levels. Both USD/JPY and EUR/JPY trade a tad weaker than yesterday’s close nonetheless. Japanese bond yields add another 5.7 bps at the long end of the curve. The 10-y tried but failed to take out the 0.80% barrier. Core markets yesterday were uninspired. German yields whipsawed with minor changes on a net daily basis. US yields added a few bps at the long end. Support for the 10-y yield between 4.09% and 4.13% survived as a result. The US dollar caught a breather after its recent advance. The trade-weighted index dropped from 104.2 to 103.54. EUR/USD recovered from 1.0764 to 1.0794. European stocks marched gradually lower after the likes of the DAX hit a new record high earlier this week and the EuroStox50 hit a new YtD high intraday on Wednesday. US equities printed higher though, with the Nasdaq (+1.37%) outperforming.

This week’s eco calendar culminates into today’s payrolls report (and a lesser extend Michigan consumer confidence). Together with next week’s November CPI it’s the final important input to the Fed December 13 policy meeting. Consensus expects job growth of 183k with the “unofficial” (whisper) number at a lower 169k. The unemployment rate is seen stabilizing at 3.9% with wage growth just a tad lower at 4%. Recent market positioning was incredible but we are wary to call the end of it ahead of important data such as today’s. In terms of rate cut pricing, in theory there’s still some room left for a kick-off in March (two in three probability discounted). While obviously not our preferred scenario, disappointing payrolls could further cement the idea. Both the US 2-y and 10-y yield are at critical technical support zones. The former breaking sub 4.60% sustainably offers perspective for a 20 bps move further down. The 4.09/4.13% area has to hold in the 10-y to prevent a fast return sub 4%.

News & Views

The Reserve Bank of India today left its policy rate at 6.50%. The decision was largely expected. The committee maintained a policy focus on ‘withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth’. Since the previous policy meeting, headline inflation cooled to 4.9% in October from  7.4% in July and the moderation was observed in all components of CPI. However, the MPC sees upside risks to food price inflation in the coming months. Economy activity was buoyant in Q2 (7.6% Y/Y) due to strong domestic demand. The bank upwardly revised its growth forecast for the 2023-24 fiscal year to 7.0% from 6.5%. It sees growth at 6.4% in Q3 2024-25. CPI inflation is expected at 5.4% for 2024-25 and is projected to slow to between 4.0% and 5.2% in the first three quarters of 2024-25. The RBI concludes that the target of 4.0% is yet to be reached and that it has to stay course, suggesting that rates still might stay at current levels for some meetings to come. The Indian rupee is trading little change near USD/INR 83.7, holding near historic low levels against the US dollar.

The final reading of the Japan Q3 GDP brought an unexpected negative surprise as growth was substantially downwardly revised from a contraction of -0.5% Q/Q to -0.7%. The revision was mainly due to a downgrade of private consumption (-0.2% Q/Q from unchanged). Inventories also contributed more negatively than expected and business spending contracted (-0.4% Q/Q). The contribution of net exports was maintained at a -0.1 ppt. The Q3 contraction was the biggest since the pandemic and might complicate the debate on starting BoJ policy normalization in the near term. On the flipside, October labour cash earnings printed stronger than expected at 1.5% Y/Y. However, real earnings remain negative (-2.3%). Households spending in October also was less negative than feared (-2.5% Y/Y vs -2.9% expected). The BoJ meets on December 19.