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The yen has stabilized after massive losses last week. In the North American session, the USD/JPY is trading at 148.03 at the time of writing, up 0.45%.

Ishiba’s U-turn sends yen reeling

The yen is coming off a spectacularly bad week with a 4.5% decline. This marked the yen’s worst week since 2020, during the covid pandemic. The sharp decline was driven by the political drama in Japan, which included the election of Shigeru Ishiba as the new prime minister. Ishiba has supported the Bank of Japan tightening policy in the past, but he has taken a U-turn on monetary policy since being elected prime minister.

Ishiba may have shifted his stance in order to avoid any divisive issues, such as raising interest rates, ahead of the snap election on October 27. The election will be followed by the next BoJ meeting on October 31, with the BoJ expected to maintain its policy settings.

On Wednesday, Ishiba met with BoJ Governor Ueda and said that Japan did not need to raise rates further. In a speech to parliament on Friday, Ishiba pledged to defeat deflation, a message which signaled a continuation of “Abenomics”, which advocates an accommodative policy. The yen slid 1.1% on Friday as expectations for a rate hike have evaporated.

Ishiba’s dovish stance and comments by BoJ officials that it the Bank will be extremely cautious before raising rates has dashed expectations for a near-term rate hike and made the Japanese currency less attractive to investors.

US nonfarm payrolls blow past estimate

The US labor market surprised to the upside, as September nonfarm payrolls surged by 254 thousand, up from a revised 159 thousand in August and blowing past the market estimate of 140 thousand. This was the strongest job report in six months. The unemployment rate dipped lower to 4.1%, compared to 4.2% in August and below the market estimate of 4.2%. The markets have raised the odds of a 25-basis point cut at the Fed November meeting to 87%, compared to 65% one week ago.

USD/JPY Technical

• USD/JPY tested support at 147.89 earlier. Below, there is support at 146.78
  There is resistance at 149.86 and 150.97

Markets

Friday’s blow-out payrolls still echoed through markets at the start of the new week. Core bond yields add several basis points again with US Treasuries underperforming German Bunds. US rates jump another 3.3 (30-yr) to 5.5 bps (2-yr). Net gains at the front end already total 30 bps in just two days. Several maturities take out (10-yr) or are intensively testing (2-yr) the psychologically important 4% barrier. US money market odds for a 50 bps Fed November cut evaporated completely and we think there’s little that Thursday’s US inflation numbers can change about that. Even a 25 bps move is no longer fully discounted (85%), suggesting some have started considering a skip. German yields were caught in the slipstream and eke out 2.4-3.6 bps across the curve. An ECB cut in October is still not fully priced in yet, even as ECB heavyweight Villeroy endorsed it overnight. UK yields long chased their US counterparts before taking the lead in early US dealings. Net daily changes vary between +4 bps (30-yr) to 6.7 bps (2-yr, at its highest since end June). Oil prices supported the yield rebound by testing the $80 barrel (Brent) for the first time since end-August on lingering geopolitical concerns. European stock markets erased earlier losses to trade a modest 0.3% higher (EuroStoxx50) throughout the session. US indices dip at the open. The more fragile risk environment compared to the no-landing narrative that drove the Friday gains is also obvious in currency markets. The Japanese yen and the Swiss franc outperform global peers while cyclical currencies (AUD, NZD …) lag behind. USD/JPY retreated to 148.04, EUR/CHF to 0.937. The dollar and the euro keep each other perfectly balanced around 1.098 support (March 2024 interim high, 38.2% retracement on the EUR/USD 2024 YtD low-to-high). Despite the solid UK gilt yield rise, sterling trades on the backfoot. EUR/GBP erases much of Friday’s drop but taking out the 0.84 lever is one step too far for the moment. A weak pound also dictates moves in cable. GBP/USD edged towards a new (early) October low of 1.308.

News & Views

After four months of lower than expected retail sales in Hungary, the Statistical office today reported a material beat for the month of August. The volume of sales rose by 0.8% M/M and 4.1% Y/Y (was 2.5% in July with analysts expecting 2.8% Y/Y). Sales both rose in food shops (7.5% Y/Y ) and non-food retailing (2.9%). Sales in automotive fuels declined 1.2%. The cumulative volume of sales over the January-August period was higher by 2.8% compared to last year. Beter than expected retail data might give some comfort after the economy in Q2 contracted by 0.2% Q.Q. Other data showed a further a rebound in the country’s trade surplus to €671m from €167m. However, this rise was due to the value of exports (-7.8% M/M) declining less than imports (-12.2%) M/M. Whatever, they weren’t able to change fortunes for the forint. At EUR/HUF 402, the forint trades at the weakest level against the euro since March of last year as higher US yields and a strong dollar are weighing on emerging market currencies. Forint weakness also reduces the maneuvering room of the MNB even as deputy -governor Virag at after the September policy meeting said that rate cuts might be on the table at every of the three remaining meetings this year.

According the UK Mortgage lender Halifax, UK house prices in September climbed for the third month in a row. A 0.3% M/M increase brought Y/Y-price growth to 4.7%, the highest rate since November 2022. This also brought the average property price (£293 399) only a whisker away from the record high reached in June 2022. In its assessment Halifax remains rather cautious. It states that ‘the increase is largely a recovery of lost ground. Looking back two years ago, price increased by just +0.4%.’ It nevertheless sees that market conditions have steadily improved over summer and into early autumn. Mortgage affordability has been easing thanks to strong wage growth. Halifax expects improved mortgage affordability to remain in place, but as housing costs remains a challenge form many, it expects property price growth to remain modest this and next year. Last week, BoE governor Bailey suggested more room for a more activist easing if inflation continues to decline, but US data end last week both pushed short-term (2-y and 10-y Gilt yield near 4.20%) well of the cycle lows reached in August and/or September.

Graphs

US 10-yr yield tests/takes out the 4% barrier as exceptional payrolls report still echoes through markets

Forint (EUR/HUF) suffers from tripple whammy: rebounding core bond yields, geopolitics and the EC taking the country to court

EuroStoxx50 looking for direction after Friday’s little boost fades

Oil prices briefly hit the $80 mark, further leaving behind the recent lows on a supply-driven rally

Daily Pivots: (S1) 1.0937; (P) 1.0989; (R1) 1.1026; More....

EUR/USD's fall from 1.1213 is in progress and intraday bias stays on the downside for 38.2% retracement of 1.0447 to 1.1213 at 1.0920. Sustained break there will argue that fall from 1.1213 is the third leg of the corrective pattern from 1.1274. In this case, deeper decline would be seen to 61.8% retracement at 1.0740 next. On the upside, above 1.1039 minor resistance will turn intraday bias neutral first.

In the bigger picture, rejection by 1.1274 resistance suggests that corrective pattern from 1.1274 (2023 high) is not completed yet. Instead, decline from 1.1213 might be another falling leg. Sustained break of 55 W EMA (now at 1.0877) will validate this case, and bring deeper fall towards 1.0447 support again.

Daily Pivots: (S1) 0.8518; (P) 0.8563; (R1) 0.8626; More…

Intraday bias in USD/CHF is turned neutral with current retreat and some consolidations would be seen. Further rise is in favor as long as 0.8499 minor support holds. Above 0.8606 will target 38.2% retracement of 0.9223 to 0.8374 at 0.8698. Sustained break there will argue that fall from 0.9223 has completed after defending 0.8332 low. Next target will be 61.8% retracement at 0.8899. On the downside, break of 0.8499 will turn bias back to the downside for retesting 0.8374 low instead.

In the bigger picture, price actions from 0.8332 (2023 low) are currently seen as a medium term corrective pattern, with fall from 0.9223 as the second leg. Strong support could be seen from 0.8332 to bring rebound. Yet, overall outlook will continue to stay bearish as long as 0.9243 resistance holds. Firm break of 0.8332, however, will resume larger down trend from 1.0146 (2022 high).

Daily Pivots: (S1) 146.78; (P) 147.89; (R1) 149.86; More...

USD/JPY's rebound from 139.57 is still in progress and intraday bias stays on the upside. Rise from 139.57 is seen as the second leg of the corrective pattern from 161.94. Break of 149.35 resistance will target 61.8% retracement of 161.94 to 139.57 at 153.39 next. On the downside, below 145.91 minor support will turn intraday bias neutral again.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should now be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Daily Pivots: (S1) 1.3072; (P) 1.3123; (R1) 1.3177; More...

Intraday bias in GBP/USD is back on the downside with breach of 1.3069 temporary low. Fall from 1.3433 is in progress for 1.3000 cluster support (38.2% retracement of 1.2298 to 1.3433 at 1.2999). Strong support should be seen there to bring rebound. On the upside, above 1.3174 minor resistance will turn intraday bias neutral again first.

In the bigger picture, as long as 1.3000 support holds, the up trend from 1.0351 (2022 low) is still in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. However, considering mild bearish divergence condition in D MACD, decisive break of 1.3000 will argue that a medium term top is already in place, and bring deeper fall back to 1.2664 support next.

Risk sentiment is a little bit subdued as US futures trade in the red ahead of North American session. Yen is recovering broadly, partly supported by Japan’s renewed verbal intervention efforts, with traders closely monitoring the possibility of action if USD/JPY breaches 150 psychological level. Swiss Franc and Dollar are also on the firmer side. On the other hand, Sterling, Kiwi and Loonie are the weaker ones. Meanwhile, Euro and Aussie are mixed in the middle.

Looking ahead, the upcoming Asian session will focus on the release of the RBA minutes, Australia’s Westpac consumer sentiment, and NAB business confidence data. Speculation continues around the timing of the first rate cut by the RBA, with three of the country’s four major banks—Westpac, ANZ, and NAB—forecasting a February cut next year. Commonwealth Bank remains the outlier, predicting a rate cut as early as December. Any sharp deterioration in consumer and business sentiment could prompt a rethink by the RBA. However, the key indicator will still be Q3 CPI data, set to be released on October 30.

Aussie has been in a mixed path this month, outperforming Kiwi, but lagging behind Loonie. Technically, As long as 0.9195 resistance turned support holds, rise from 0.8562 is still expected to continue through 0.9375 at a later stage. However, firm break of 0.9195 will open up deeper pullback to 0.9016 support, or even further to medium term channel support (now at 0.8912).

In Europe, at the time of writing, FTSE is up 0.48%. DAX is down -0.04%. CAC is up 040%. Germany 10-year yield is up 0.037 at 2.251. UK 10-year yield is up 0.071 at 4.203. Earlier in Asia, Nikkei rose 1.80%. Hong Kong HSI rose 1.60%. China was on the last day of holidays. Singapore Strait Times rose 0.28%. Japan 10-year JGB yield rose 0.040 to 0.926.

Eurozone Sentix rises to -13.8, expectations jump on ECB cut and China stimulus

Eurozone Sentix Confidence Improves Slightly, Expectations Rise Amid Stimulus and Rate Cuts

Eurozone Sentix Investor Confidence edged up in October, rising from -15.4 to -13.8, slightly better than the forecast of -13.9. Current Situation Index saw its fourth consecutive decline, down from -22.5 to -23.3, its lowest level since December 2023. Expectations Index improved notably from -8.0 to -3.8.

Sentix remarked, "The downward economic trend has been halted for the time being," as Eurozone economy attempts to "find its way out of recession/stagnation". Investors are finding renewed optimism, not only due to ECB’s recent rate cuts but also the stimulus measures coming out of China.

The Sentix central bank theme barometer remains supportive, although it has pulled back from the higher levels seen last month. This more moderate outlook is tied to expectations that inflation declines will slow.

Eurozone retail sales rise 0.2% mom in Aug, EU up 0.3%...

Eurozone retail sales volume rose 0.2% mom in August, matched expectations. The increase was driven by a 0.2% rise in food, drinks, and tobacco sales, a 0.3% boost in non-food products (excluding automotive fuel), and a 1.1% jump in sales of automotive fuel from specialised stores.

In the wider EU, retail sales grew by 0.3% month-on-month. Luxembourg led the gains with a 5.3% increase in total retail trade volume, followed by Cyprus at 2.2% and Romania at 1.6%. On the downside, Denmark saw the steepest drop at -1.5%, while Slovakia, Bulgaria, and Croatia also posted declines in retail trade volume.

BoJ upgrades economic outlook for two regions, cautions on wage pressures for small firms

In its latest Regional Economic Report, BoC indicated that all nine regions in the country are "recovering moderately, picking up, or picking up moderately". Also, BoJ upgraded its economic assessments for the Hokuriku and Tokai regions, reflecting stronger local conditions.

In a separate release summarizing discussions among branch managers, BoJ noted that many business leaders increasingly believe wages need to continue rising into next year. This reflects growing wage pressure, which has been a key driver of consumption. Younger workers, in particular, have seen "fairly big pay hikes", boosting their spending power and supporting the broader economy.

However, the central bank cautioned that smaller and medium-sized businesses are struggling to generate sufficient profits to sustain wage hikes. BoJ emphasized that this situation "required vigilance."

NZIER shadow board evenly split on size of RBNZ rate cut this week

The NZIER Shadow Board is evenly divided on whether RBNZ should lower the OCR by 25 or 50 basis points in its upcoming meeting this week.

Those advocating for a 50bps cut highlighted ongoing economic weakness and rising excess capacity, as well as easing headline inflation and inflation expectations, which they believe justify a larger reduction in rates.

Other members preferred a more cautious 25bps cut, citing persistent risks from non-tradable inflation and recommending a more measured approach.

Looking ahead, the Shadow Board agrees that RBNZ should continue with its easing cycle over the next year, with most members expecting OCR to settle between 3.5% and 4.5%.Some members urged a gradual, data-driven approach, while others argued for more rapid cuts, pointing to weak economic conditions that may require further stimulus.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3072; (P) 1.3123; (R1) 1.3177; More...

Intraday bias in GBP/USD is back on the downside with breach of 1.3069 temporary low. Fall from 1.3433 is in progress for 1.3000 cluster support (38.2% retracement of 1.2298 to 1.3433 at 1.2999). Strong support should be seen there to bring rebound. On the upside, above 1.3174 minor resistance will turn intraday bias neutral again first.

In the bigger picture, as long as 1.3000 support holds, the up trend from 1.0351 (2022 low) is still in progress. Next target is 61.8% projection of 1.0351 to 1.3141 from 1.2298 at 1.4022. However, considering mild bearish divergence condition in D MACD, decisive break of 1.3000 will argue that a medium term top is already in place, and bring deeper fall back to 1.2664 support next.

• RBNZ decision could shake kiwi/dollar
• As inflation ticks lower, another rate cut is expected
• Policy meeting takes place on Wednesday at 01:00 GMT

RBNZ decision to cut rates

The Reserve Bank of New Zealand is poised to make another rate cut on Wednesday. The RBNZ is expected to follow the Federal Reserve with a half-point cut, as the pressure to reduce real rates at a faster tempo is being exacerbated by a sluggish activity picture and lower inflation. But while a smaller 25-bps reduction cannot be ruled out, markets may continue to favour a dovish pricing approach for an extended period, putting downward pressure on the New Zealand dollar.

Inflation slows down

The inflation rate in New Zealand has been decreasing, and the consumer price index is now approaching the RBNZ's target range of 1-3%. This decline is the result of a decrease in domestic demand pressures and a reduction in imported inflation. It is also anticipated that the inflation of services, which has remained relatively high, will decrease as economic capacity increases.

The New Zealand economy has been showing below-trend expansion in recent quarters, while domestic economic activity has clearly and broadly weakened. The global economic situation affects this slowdown since growth in developed countries stays modest/subdued. However, encouragingly for future price stability, the RBNZ notes that business inflation expectations have fallen to roughly 2% in the medium- and longer-term horizons.

The RBNZ is expected to take a more accommodative approach considering the present economic climate. The stability of inflation expectations and the degree to which price-setting behaviour adjusts to a reduced inflation environment will determine the rate of future rate reductions.

What analysts are saying

Due to the persistent weakness and rising spare capacity in the New Zealand economy, analysts are divided on the extent of the rate cut. Some analysts advocate for a decrease of 50 basis points, while others advocate for no reduction at all. Others propose a 25-basis-point reduction, which is more cautious and accounts for the potential for upside risks in non-tradable inflation. The decision made by the RBNZ will be keenly monitored for any indications related to the future course of monetary policy.

Will this policy meeting affect the kiwi/dollar?

The anticipation of a 50-bps reduction in the RBNZ will have a detrimental effect on the kiwi. Investors are likely to price in a high probability of an additional 50-bps cut for the 27 November meeting, unless there is substantial wording against further half-point reductions ahead. Markets are not entirely pricing in such a move.

In the end, a non-tradable CPI that is slightly above the consensus when it’s released on October 15 could be beneficial for hawkish repricing and provide some relief to the New Zealand dollar. However, the turbulent risk sentiment situation resulting from Middle East tensions, in addition to potential defensive prepositioning ahead of the US elections, may limit NZD’s rebound attempts. Anything less than 50 bps in the October and November meetings would probably cause a massive move to the currency. Moreover, before the US election, NZD/USD may return to approximately 0.6100.

Currently, kiwi/dollar is experiencing a bearish correction following an aggressive pullback from the 15-month peak of 0.6380 on September 30, which resulted in a loss of more than 3%.

• US 500 index is edging lower, erasing part of Friday’s rally
• It remains a tad below its all-time high, inside a pattern
• Momentum indicators could turn bearish soon

The US 500 cash index is edging lower today but remains very close to its recent all-time high. Friday’s strong US jobs report caused a significant repricing of Fed rate cut expectations and resulted in an unexpectedly positive reaction in US equities. However, this move is proving short-lived as today’s price action is erasing a good part of Friday’s rally. With the market’s attention gradually shifting to Thursday’s US CPI report, the US 500 index continues to trade inside a rising wedge, potentially opening the door to a bearish reaction.

In the meantime, the momentum indicators remain hesitantly bullish. The Average Directional Movement Index (ADX) is trading sideways, potentially signalling the end of the recent bullish move. Similarly, the RSI is hovering a tad above its midpoint area, and it appears unable to record a higher high at this stage. Interestingly, the stochastic oscillator is still trading inside its overbought territory (OB), but it could be preparing for a downward breakout. Should this move take place, it would be seen as a strong bearish signal.

Should the bulls remain confident, they can try to overcome the October 27, 2023 upward sloping trendline and then record a new all-time high. The next plausible target is the 5,800 level, with the upper boundary of the developing pattern standing in the bulls' way next.

On the other hand, the bears are trying to retake market control and push the US 500 index lower towards the busier 5,638-5,673 area, which is populated by the July 16, 2024 high and the 161.8% Fibonacci extension of the January 4, 2022 – October 12, 2022 downtrend. A break below the rising wedge pattern could help the bears tackle the expectedly strong support to be met at the 5,505-5,560 region.

To conclude, the US 500 index’s failure to record a high higher coupled with the mixed momentum indicators and the developing pattern, could open the door to a bearish move soon.

The British pound continues to lose ground on Monday after a dismal week. In the European session, GBP/USD is trading at 1.3063, down 0.48% on the day and its lowest level since October 12. The pound can’t find its footing against the rejuvenated US dollar and fell 1.9% last week.

Much of the pound’s slide was driven by comments from Bank of England Governor Bailey. On Thursday, Bailey said that the BoE could cut rates more aggressively if inflation continues to fall. The pound reacted with a slide of 1% after the comments as the markets took Bailey’s remarks as a signal that the central bank is ready to ratchet up the pace of rate cuts. The BoE trimmed rates in August for the first time in four years but paused in September. Another rate cut is widely expected at the November meeting.

A day after Bailey’s remarks, the BoE’s Chief Economist Huw Pill sought to dampen the excitement over potential rate cuts. Pill urged caution and called for a gradual easing of policy. Pill added that service inflation and wage growth were “a continued source of concern”.

US nonfarm payrolls blow past estimate

The US labor market remains resilient, as September nonfarm payrolls soared by 254 thousand, up from a revised 159 thousand in August and crushing the market estimate of 140 thousand. This was the strongest job report in six months. The unemployment rate dipped lower to 4.1%, compared to 4.2% in August and below the market estimate of 4.2%. The markets have raised the odds of a 25-basis point cut at the Fed November meeting to 87%, compared to 65% one week ago.

GBP/USD Technical

• GBP/USD is testing support at 1.3072. Below, there is support at 1.3018
  1.3123 and 1.3177 are the next resistance lines