USDJPY surges and gold shines

Japanese Yen weakens past key 150 level

By Ahmed Azzam | @3zzamous | 26 October 2023

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Morning
  • Concerns arise over potential Japanese government intervention to support the yen.

  • Rising Treasury yields, now near 5%, bolster the US dollar.

  • Australian dollar hits a one-year low after remarks by Reserve Bank Governor Michele Bullock.

  • The European Central Bank is expected to maintain interest rates.

In a week that has been nothing short of tumultuous for the financial markets, the USD/JPY pair has emerged as a frontrunner, its resilience sending ripples throughout the trading world. A surge in Treasury yields, now perched at 4.968%, coupled with a weakening Japanese yen, has spurred confidence in the greenback. The greenback's resurgence may not be limited to this week alone, with investors increasingly optimistic about the prospect of it surmounting the elusive 5% mark once more.

The Japanese yen's tumble has transcended a critical threshold, breaching the 150-per-dollar level. This has raised concerns of potential intervention by the Japanese government in the foreign exchange markets to bolster its ailing currency. Responding to the yen's decline, Japanese Finance Minister Shunichi Suzuki issued a cautious yet assertive warning to speculators, emphasizing that authorities are closely monitoring currency fluctuations "with a sense of urgency." Nonetheless, Suzuki refrained from making direct comments on the likelihood of intervention. The yen's depreciation this year can be attributed to the Bank of Japan's steadfast commitment to an ultra-easy monetary policy, even as other major central banks have embarked on a determined tightening campaign to combat inflation.

Concurrently, the financial landscape is marked by higher yields, which are exerting downward pressure on equities. The tech sector, in particular, is grappling with a disappointing earnings week. The Nasdaq, the primary casualty of this setback, plummeted by 2.4%. Presently, S&P 500 futures are down by 0.7%, and Nasdaq futures have declined by 1.1%. These struggles are further compounded by lukewarm receptions to earnings reports from Meta and Alphabet.

Amidst this turmoil, gold has retained its luster as it inches closer to testing the daily resistance level in the range of $1,983-87 once again. Investors are now eyeing the possibility of a rally to test the $2,000 mark.

Down under, the Australian dollar has hit a one-year low following remarks from Reserve Bank Governor Michele Bullock, who reported that third-quarter CPI data aligns with the central bank's expectations. This decline was further exacerbated by the prevailing strength of the US dollar. In light of these developments, market pricing for an interest rate hike has slightly receded, now standing at a 48% chance of a 25-basis-point hike on November 7.

Turning our gaze to today's market session, the spotlight falls on the euro with the European Central Bank (ECB) poised to announce its policy decision. It is widely anticipated that the ECB will maintain its current interest rates for the first time in over a year, possibly signaling its intention to retain this stance through the first half of 2024. Notably, Christine Lagarde, President of the ECB, has cautioned that the battle against inflation is far from over, stressing the need for vigilance against risks.

Furthermore, the United States is expected to unveil a significant increase in GDP growth, potentially reaching 4.5% for the last quarter, a development that could elevate longer-term yields and intensify pressure on the Federal Reserve to consider an additional rate hike. Jobless claims may see a minor uptick, and pending home sales are anticipated to decline by 2% in September after a 7.1% fall in August. Additionally, durable goods orders are on the economic horizon, promising further market insights.

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