Macro/FX Watch: Yen breaks the psychological 150 barrier

JPY: Rising yields help yen to break the perceived intervention barrier

As 10-year US Treasury yields rose higher once again overnight to 4.95, the yield gap to Japan government bonds that yield 0.85% have widened further, taking USDJPY flying past the 150-mark. The 150-level in USDJPY has been considered to be the intervention barrier for several weeks now. On October 3, USDJPY had risen to 150.16 before a sharp reversal that stoked speculation that authorities were in the market although this was not confirmed.

USDJPY traded above 150.40 in the Asian session today, and verbal jawboning from authorities had little effect. This has proved that 150 is not a line in the sand, and will potentially raise the limit for speculators to test the patience of the authorities. USD has room to firm up further this week with advance Q3 GDP scheduled to be released today is seen to be exceptionally strong. That will continue to fuel the US exceptionalism story, likely pushing yields higher and more bear steepening of the yield curve. The ECB meeting today also risks surprising dovish, given the growth headwinds facing the Eurozone economy, and this can provide a further impetus to US dollar.

What keeps intervention at bay for now could be the fact that yen weakness is concentrated against the King dollar. AUDJPY has slumped from highs of 95.899 yesterday to 94.40-levels today while EURJPY trades sideways around 158.60 after having touched near-160 levels earlier this week.

Still, the yen setup is ugly going into the Bank of Japan meeting next week. The Nikkei business daily reported over the weekend that BOJ officials were pondering the question of whether to tweak yield-curve control program as domestic long-term interest rates were moving higher in tandem with the US yields. There are also reasons to expect an upward revision to inflation forecasts, which could also fuel speculation of a policy shift. The BOJ is still likely to wait to see the results of next year’s wage negotiation before tweaking policy, but any indications on that could bring a marked downshift in USDJPY.

Catalyst for fundamental change is likely to come from US growth weakness before BOJ signals an all-clear on policy shift. Once policy-settings start to converge for the US and Japan, stretched undervaluation of the yen could mean a sharp reversal to sub-140 levels.

But until that happens, interest-rate differentials, carry and momentum continue to point towards further yen weakness. Actual intervention, if one was to happen, will also likely be faded until fundamentals change.

Market Takeaway: Speculators could be emboldened by the lack of intervention despite USDJPY rising above 150, and gains towards 152 could be more likely.

AUD: RBA hawkishness tones down

It was a quick-reversal from the post-CPI gains for AUD. We wrote about a potential temporary spike in AUD because of the upside risks to Q3 CPI, which is how it played out yesterday. China’s budget boost also underpinned, but we remained cautious and hinted that AUD cannot ignore the strong US dollar, China’s property sector overhang and global recession concerns. In fact, these concerns were back on the table and AUD was the underperformer in the US session overnight. While some have noted that Australia’s Q3 CPI beat could mean a November rate hike, RBA Governor Michele Bullock herself has toned down her hawkishness seen pre-CPI to say that the CPI number is about where it was expected. Still, it could well be a case that Bullock doesn’t want markets to front-run the Board’s decision. A November rate hike could be more likely than not, given Q3 CPI was much above RBA expectations and higher oil prices also underpinning. RBA decision is due on November 7, and next two weeks could bring some upside risks to AUD but a broader downtrend as strong US dollar and geopolitical risks play out.

Geopolitical risks were also back on the radar as Israel PM said they were preparing for a ground invasion and that Israel was in a “battle for its existence”. This has hurt risk sentiment, weighing on procyclical currencies in general. AUDUSD is now below 0.63 handle and printed one-year lows of 0.6270. 2022 low of 0.6170 could be the next target. NZDUSD also broke below 0.58 to YTD lows of 0.5774 and immediate support is seen at 76.4% retracement level at 0.5754. AUDNZD reversed from 1.09 and economic dynamics could favor more downside below 1.08.

Market Takeaway: Bouts of AUD strength could emerge in the run upto the next RBA meeting, but broad downside pressure to remain on AUD until China’s infrastructure spending picks up.