Japanese intervention to weaken Yen drives rally in US$; Euro weaken as Italian and Spanish bond yields rise

Japanese intervention to weaken Yen drives rally in US$; Euro weaken as Italian and Spanish bond yields rise

By Mike Burrrowes

NZD

The NZD has again taken its cues from global developments. The surprise intervention by Japanese authorities yesterday (see below) triggered a broad based rally in the USD. This saw NZD/USD fall from around 0.8200 to an intra-day low of 0.8080. Overnight, NZD/USD stabilised above 0.8100.

The renewed concerns over rising bond yields in Italy and Spain saw NZD/EUR make decent gains overnight. NZD/EUR is currently trading around 0.5820, from 0.5780 yesterday afternoon. NZD/GBP is currently trading around 0.5040, after falling to an intra-day low of 0.5020.

NZD/AUD made steady gains through the day, reaching a high of 0.7700. The move appeared to be related to some traders getting positioned ahead of the RBA meeting today. However, overnight the cross faded back to 0.7950, with some noting strong AUD month-end demand colouring trading.

With a rate cut from the RBA almost fully priced, expect a larger reaction should they decide to keep rates unchanged. Looking beyond today’s decision, we still believe that interest rates in NZ and Australia are set to converge over the next 12 months. We expect this will help NZD/AUD gradually appreciate to beyond 0.8500 by September next year.

Looking to the day ahead, locally we have the Quarterly Employment Survey wage report. The QES and Labour Cost Indexes should otherwise show ongoing reasonable growth in wage rates, so not yet problematic for inflation. On the day, support for NZD/USD is seen at 0.8070 and resistance at 0.8150.

Majors

The major move in FX markets occurred yesterday after Japanese authorities intervened to weaken the JPY. This action saw a broad based bounce in the USD. Overnight, global risk appetite waned as investors fretted about rising bond yields for Italy and Spain.

The renewed concerns over Italy and Spain saw risk sensitive assets lose ground. The S&P500 index and Euro Stoxx 50 index shed 1.4% and 3.1% respectively. The VIX index (proxy for risk aversion) surged from 24.5 to 27.6.

After USD/JPY fell to a record low at 75.35 yesterday, Japanese authorities took the bold step of intervening to weaken the JPY. The intervention immediately catapulted USD/JPY to 79.40, but overnight it has slipped back to 78.00. The Japanese authorities believe that the JPY moves are based on speculation and not fundamentals. However, with global yields extremely low and poor economic growth in major developed countries, it’s not so clear that the JPY’s level is unwarranted. It is difficult for the Japanese economy, that is clear.

Overnight, EUR/USD was the weakest performing currency as markets have shifted their focus to rising Italian and Spanish bond yields. This saw EUR/USD fall from around 1.4000 to an intra-day low of 1.3900, currently 1.3950. The next key event for the EUR will be the ECB decision on Thursday evening.

The move in the JPY yesterday saw all the major currencies weaken against the USD. In particular, the risk sensitive AUD/USD plunged from 1.0690 to just above 1.0500 during the day. However, overnight AUD/USD has recovered back to 1.0600. The focus for the AUD will shift to today’s RBA decision at 4.30pm NZT. The OIS market is pricing an 80% chance of a 25bp cut from the RBA today. The majority of analysts are also calling for a cut today.    

The GBP was the only currency to appreciate against the USD over the past 24 hours. GBP/USD plunged to 1.5970 after the Japanese intervention, but overnight it has bounced to 1.6140.

US data outturns painted a mixed picture. The Chicago PMI for October was weaker-than-expected (58.4 vs. 59.0) but this was offset by stronger-than-expected Dallas Federal manufacturing activity index for October (2.3 vs. -5.0 expected).

Looking to the night ahead, market will be looking to the release of PMI manufacturing data for the Eurozone, UK and US. The market expects a further decline in the Eurozone and UK PMI, while the US PMI is expected to stabilise above 50. 

Mike Burrowes is part of the BNZ research team. 

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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