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Japan intervenes in USDJPY, GBP down despite rate rise

Good morning

Well the excitement of yesterday came in the form of BoJ who stepped in to officially intervene in the currency markets to strengthen yen for the first time since the Asian crisis way back in 1998. Yes, they have intervened since then to weaken yen, but not to support it. Back in 1998 the US Fed also sold USDJPY as a coordinated intervention, but I think this time it was the Japanese acting unilaterally. The volumes traded in USDJPY were quite exceptional, reaching some $80 billion, four or five times the usual volumes. This was something of a historic day.

The action pushed yen higher, with USDJPY moving down from near 146.00 to reach 140.35 yesterday afternoon before stabilising in the 142.30 area. EURJPY moved from 143.50 to 137.75, before settling around 140.00, while GBPJPY slipped from 164.40 to 159.15, finally settling around 160.35. Have BoJ done enough now to prevent further yen weakness? It will certainly deter speculative yen sellers in the short term, that’s for sure. If we do see further yen weakness I suspect we’ll also see more intervention….

The vast selling of US dollars did impact other currency pairs, with GBPUSD trading up to 1.1350 and EURUSD up to 0.9905. Unlike Yen however, these could not hold their gains against USD.

GBP did work its way back up to 1.1365 ahead of the BoE rate announcement but when the market saw a 50bps rise rather than the possible 75bps, GBP fell sharply to 1.1270. It clawed its way back up to mid-1.13s through the afternoon but once again failed to hold those gains and traded back to mid-1.12s. The details are quite interesting. Three members voted for a 75bps rate rise, five voted for the 50bps move and one, Dhingra, the newest member voted for a 25bps rise, in line with her comments in June where she spoke of a more gradual approach to tightening.

With UK rates now 2.25%, there are clearly more rises to come but I think it is now unlikely the BoE will move in increments larger than 50bps unless there is a significant change in data over the coming months. Goldmans disagree, they now see two 75bps, each coming at the Nov and Dec meetings. At the November BoE meeting we will also see updated forecasts.

Overnight markets were reasonably quiet but this morning yet another bout of USD strength has sent EURUSD below 0.9800 and GBPUSD below 1.1200. Just no respite at all. 1.1000 looking like a real possibility in GBPUSD, as you know I continue to look at downside GBPUSD trades, it is getting difficult to find much with a strike above 1.1000 without taking on a load of risk at these levels. However we do have our ways, always happy to discuss.

This morning we will hear from UK’s Chancellor Kwarteng and his mini budget. It is expected that tax cuts will figure high on the agenda, which of course is great as it may give us all more money to spend on our domestic energy bills. The tax cuts are expected to cos up to £30bn, while the energy bill price cap could cost some £100bn. Unlikely to offer much support to GBP.

Finally, it is interesting to read reports of Russians fleeing to the borders in an attempt to leave the country after mobilisation of reservists was announced. Never sure whether we’re seeing propaganda or whether there really are mile-long queues of cars of people trying to leave the country. One way airline ticket prices to almost anywhere are reported to have leapt in price. It seems there are concerns that although the mobilisation was said to be for just those with military experience, it could be far larger and for more widespread than officially announced.

The weekend seems a long way off right now though and with Powell speaking at 7pm we might have to be at our desks longer than we’d normally prefer on a Friday. Hopefully we’ll be finished in time to watch England play Italy in the Nations League, this will be an interesting test for both teams, England will. B e looking at avenge the defeat to Italy at the Euro 2020 final last July, Italy have had some rotten results since then, England really need to step up for this one.

- 09.00 EU S&P manufacturing, services PMI

- 09.30 UK S&P manufacturing, services PMI

- 09.30 UK ‘budget’

- 13.30 CAD retail sales

- 14.45 US S&P manufacturing, services PMI

- 19.00 Feds Powell speaks

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