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Japanese Yen Ignores Intervention Threat, Soars to 14-Year High Against US Dollar

The Japanese Yen soared to a 14-year high against the US dollar despite direct government warnings of intervention against ‘abnormal’ currency moves. Further volatility looks likely ahead as liquidity thins out ahead of the US Thanksgiving holiday.

Key Overnight Developments

• Bank of Japan May Resume Buying Corporate Debt, Meeting Minutes Show
• Japan’s Fujii Says Government Must Act Against ‘Abnormal’ Currency Moves
• Australian Business Investment Unexpectedly Tumbles in the Third Quarter

Critical Levels



The overall result of a volatile overnight session saw the Euro retrace some of its US-session gains, trading down as much as 0.2% against the US Dollar. The British Pound traded sideways in a choppy range near the 1.67 level.

Asia Session Highlights



Minutes from October’s Bank of Japan monetary policy meeting revealed the central bank will maintain an “accommodative” financial environment and is prepared to reinstate emergency programs to buy corporate debt if additional support to business lending is required. That said, policymakers reiterated that, in spite of a number of downside risks, the economy remains on a path to sustainable growth. The language suggests the BOJ is paying lip service to the government’s insistent calls for the central bank to deal with deflation in a bid to keep the central bank’s asset-buying programs in place. These programs have been a source of persistent tension between the BOJ and the Ministry of Finance, with the BOJ eager to unwind them while the MOF prefers to see them continue as a way for the government to keep long-term borrowing costs in check as it prints bonds to cover Japan’s soaring budget deficit.

For their part, the Japanese government seemed more concerned with the exchange rate as the Japanese Yen traded to a 14-year high against the US Dollar. Cabinet Secretary Hirofumi Hirano said the administration was closely watching developments in the FX markets, while Finance Minister Hirohisa Fujii went a step further to say that action needs to be taken against “abnormal” currency movements. It is unclear if this is a toothless attempt to talk down the Yen or whether actual intervention is ahead, but traders were indifferent to the announcement with USDJPY moving up a mere 12 pips as the comments crossed the wires before resuming a plunge below the 87.00 level.

In Australia, Private Capital Expenditure tumbled -3.9% in the third quarter, sinking expectations of a 1% advance. However, the Australian Bureau of Statistics noted that it made a number of changes in the way the metric is computed, saying that “caution should be exercised in using [this data] as an indicator of [business investment as a portion of GDP].” This means the drop-off may not keep the central bank from raising interest rates again in December. Still, traders were noticeably spooked by the announcement, with a Credit Suisse gauge of priced-in rate hike expectations showing investors now see the probability of a third consecutive 0.25% increase at 65%, down from 76% yesterday.


Euro Session: What to Expect



A preliminary estimate of Germany’s Consumer Price Index is set to show that the annual pace of inflation increased for the first time since June. As with the previous month, higher commodity prices are will likely account for the upswing. A return to positive (if modest) price growth in the Euro Zone’s largest economy is welcome news for the European Central Bank, suggesting the currency bloc may be able to avoid a debilitating period of deflation without implementing additional monetary stimulus measures. Persistent declines in CPI would undermine recovery as expectations of lower prices discourage spending and investment as consumers and businesses wait for a better bargain in the future.

Importantly, the catalysts behind the moderation in CPI readings are intimately tied to the outlook for risk appetite across capital markets, with a UBS gauge of global commodity prices over 85% correlated with a Morgan Stanley index of world stock prices since June. As we have noted on numerous occasions, October may have marked a major turn in risk appetite as equity prices dropped the most in eight months while the VIX Index, a stand-by measure of investors’ fear, rose the most in a year. Relative equity valuations look overdone with prices trading at the highest levels relative to earnings in seven years, so a correction lower seems justified. If this proves to be the case, a parallel drop in commodities is may do away with upward pressure on consumer prices, bringing deflation back to the forefront of the ECB’s policy concerns.

Turning to risk trends, the earnings docket is fairly tame in European hours. A third-quarter profits announcement from copper miner Antofagasta Plc is the only item on the earnings calendar. On balance, the drop in liquidity around the US Thanksgiving holiday is likely to be the most important factor in play ahead, opening the door for sharp swings in prices across capital markets into the end of the trading week.


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