JPY Approaching New Lows as Extra Budget Approved

JPY: Close to lows with limited noise from Tokyo

The USD/JPY rate is hovering close to recent highs, despite a correction prompted by weak US data and lower yields. Following last week's across-the-board weakness in the US dollar due to a disappointing jobs report, this week witnessed a reversal, with all G10 currencies showing weakness. The likelihood of breaching the November 1st high of 151.72 in USD/JPY seems imminent, with minimal resistance from Tokyo. The dollar's positive momentum was supported by a substantial increase in yields, driven by a nearly 20bps move in the 10-year yield, notably catalysed by a concerning 30-year bond auction.

The 30-year auction raised alarms as the yield drawn from it was 4.769%, 5bps higher than its pre-auction trading level, a rare occurrence according to Bloomberg data over the past decade. The impact of this poor auction may linger, with short-term risks for yields leaning towards the upside. Fed Chair Powell's remarks, expressing the FOMC's lack of confidence in achieving a sufficiently restrictive stance, added negativity to the bond market. This, coupled with the correction in the US dollar following the poor bond auction, heightened demand for the dollar. However, the sustainability of US dollar strength amid higher yields from weak Treasury bond auctions remains questionable, especially as the US economy potentially weakens.

Japan's fiscal situation is challenging, but unlike the Fed, the Bank of Japan is not selling Japanese Government Bonds (JGBs). It is unlikely that Japan will engage in Quantitative Tightening (QT), and the approval of a new fiscal stimulus package further increases the supply of JGBs. The JPY 13.2 trillion package, however, has not been well-received by the public, reflecting concerns about Japan's high 255% debt-to-GDP ratio. This suggests that a significant portion of the stimulus may not be spent. Despite the negative sentiment, the US yield movement, and the anticipated limited impact of the stimulus on growth are expected to keep USD/JPY on a gradual upward trend, particularly with Tokyo currently remaining silent on USD/JPY levels.

GBP: Better GDP data but no game-changer

Source: Finlogix Calendar

The recently released Q3 GDP data for the UK, unveiled on Friday, November 10, indicates stronger-than-expected economic conditions. However, the extent of this outperformance is not anticipated to prompt significant changes in market pricing. Contrary to the market consensus of a -0.1% Q/Q contraction, real GDP remained flat in Q3, aligning with the Bank of England's earlier projection of flat growth, extending through to the end of next year. Despite the positive headline, the composition of growth presents a mixed picture, with weaknesses observed in consumer spending, business investment, and government spending. The sole contributor to growth was net trade, which may not be a dependable sector for the UK given the prevailing global demand conditions. Growth was further hampered by strikes in education and health, along with unusual weather patterns, all occurring against the backdrop of an escalating monetary tightening transmission.

While the market has priced in approximately 40 basis points of monetary easing in the UK by September next year, this figure is comparatively less than that for Europe and the US. The newly released GDP data is unlikely to significantly alter these expectations. The market is expected to consolidate its position leading up to next week, marked by the crucial CPI data release.

The recent surge in UST bond yields, following a disappointing 30-year auction, is poised to influence this week's trading. This increase in yields has induced higher risk aversion, contributing to mostly lower equities in Asia. Consequently, Gilt yields are anticipated to move higher today in response to the UST bond yield movement. However, statements from BoE's Huw Pill, suggesting the plausibility of rate cuts by mid-2024, have generally kept yields pressured to the downside in the UK.Top of Form

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