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At the beginning of the week, the USD/JPY pair-initiated trading at 149.52. The US dollar displayed early strength, thanks to the US Congress averting a government shutdown by passing a stopgap spending bill on the preceding Friday. As a result, the USD/JPY managed to surpass the 149.5 mark. However, concerns about potential intervention by Japanese authorities hindered further upward movement. The pair gradually approached the 150 thresholds as the US ISM Manufacturing Index exceeded market expectations, bolstering US Treasury (UST) yields and the overall strength of the US dollar.
On October 3rd, during European trading hours, the pair briefly dipped to around 149.5. Nevertheless, positive news arrived as the US job openings and labour turnover survey for August, announced during US trading hours, revealed job openings well above expectations. This development propelled the USD/JPY beyond 150, reaching a high of 150.16, only to later decline to a low of 147.30. It subsequently recovered swiftly to settle around the 149 level, maintaining a top-heavy position on October 4th, possibly due to concerns about market volatility.
The US dollar faced weakening during European trading on the same day, causing the USD/JPY to gradually fall below 148.5 on the morning of October 5th. Although it briefly rebounded to the low-to-mid 149 level, it retreated to the 148-range due to ongoing dollar softness. As of the time of writing this report on October 6th, it was trading at around 148.5.
Notably, the decline in cross-yen rates was also remarkable, as the US dollar's initial strength waned as the week progressed. This situation resulted in the yen emerging as the strongest G10 currency for the week, a position it had not held in some time.
The rise in UST yields and the US dollar's strength at the start of the week was primarily attributed to the relief following the US Congress's successful passage of the stopgap spending bill. The 10-year UST yield surged by 28 basis points from the week's outset to October 4th, pushing the USD/JPY briefly beyond 150. Euro weakness against the US dollar fuelled speculations that the EUR/USD might reach parity. However, the uptick in UST yields temporarily stalled, partly due to the ousting of House Speaker Kevin McCarthy following the passage of the spending bill and comments by the hawkish Federal Reserve Bank of Cleveland President, Loretta Mester, suggesting that the recent increase in long-term rates could affect monetary policy decisions.
This scenario raised questions about the likelihood of a rate hike at the FOMC meeting scheduled for early November. Additionally, US stock prices, already exhibiting softness, continued to decline, and the price of oil experienced a sharp drop. Consequently, the US dollar lost its strength under these conditions.
Japanese authorities became increasingly vigilant in monitoring the gradual rise of the USD/JPY due to the strong US dollar. While Finance Minister Shunichi Suzuki made no comment regarding the volatility on October 3rd, Vice Finance Minister for International Affairs, Masato Kanda, emphasized that a series of one-way movements and significant fluctuations within a short period could be considered excessive volatility. He also noted the 20-yen slide against the dollar since the beginning of the year. This indicated that Japanese authorities were not solely concerned about market volatility, and the comment was made immediately after the USD/JPY touched 150, indicating a significant psychological barrier.
Upcoming key events included the US Consumer Price Index (CPI) for September today 12/10/2023. Fed Chair Jay Powell's speech on October 19th was expected to offer some insight into the Fed's plans for the November FOMC meeting, with the CPI data providing clues. It was too early to conclude that the market had shifted direction entirely, given the pause in the rise of UST yields and the softening of the US dollar in the latter half of the week. This softening could potentially make a rate hike seem unnecessary, especially considering the PCE core deflator was decelerating more rapidly than the Fed had anticipated, and the tightening effect of the increase in long-term interest rates to date.
Furthermore, in the upcoming week, communication between authorities from various countries was expected to intensify. This included the annual meetings of the World Bank and IMF, as well as the G20 Finance Ministers and Central Bank Governors meeting. Emerging countries, primarily in Asia, had announced interventions in the foreign exchange market to protect their currencies against the US dollar. In contrast, Japanese authorities had been discussing cooperation with foreign counterparts to address the weak yen. Based on past experiences, it was possible that some form of agreement would be reached, possibly behind closed doors, resulting in changes to the monetary and currency policies of the involved countries.
Additionally, Japan's long-term interest rates reached 0.80% during the week. While some considered it a stretch to suggest that the 1.00% fixed-rate purchase operation, previously positioned by BOJ Governor Kazuo Ueda as a backstop, was imminent, the continued rise of Japan's long-term interest rates, especially in the latter part of the week, raised questions about the BOJ's potential shift in monetary policy due to evolving factors, including exchange rates. Speculation regarding the BOJ's monetary policy meeting and Outlook Report at the end of October was on the rise. Some anticipated that the BOJ would have to revise upward its inflation outlook in the Outlook Report and potentially increase the upper limit of fixed-rate purchase operations. Governor Ueda was expected to speak at the G20 meeting, and attention was warranted to monitor headline risk, including preview reports.
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