Daily Market Comment – Yen selling resumes, euro engines fire up

  • Yen back under selling pressure as FX intervention hopes fade  
  • Euro advances, buoyed by energy price cap and ECB signals
  • Dollar down but not out, stock markets defend recent gains 
Yen resumes slide

It has been an excruciating year for the Japanese yen, which has lost almost 25% of its value against the US dollar, crushed by one of the greatest episodes of monetary policy divergence in modern history. With central banks across the world raising interest rates at an incredible pace but the Bank of Japan refusing to play this game, rate differentials have widened, devastating the yen as capital flows out of the country in search of better returns abroad. 

Threats of FX intervention by Japanese authorities have fallen on deaf ears, mostly because market participants view such warnings as a bluff. Past instances of intervention were carried out in coordination with Europe and America, which is unlikely this time since those economies won’t agree to weaken their own currencies and amplify inflationary pressures, simply to help Japan deal with a crisis partly of its own making. 

Solo intervention implies a lower probability of success, it would require a ton of FX reserves, and could even backfire since a failed attempt might give speculators the ‘green light’ to enter new short bets. Therefore, the bar for Tokyo to intervene is sky high, and with the latest comments from Governor Kuroda suggesting no changes in strategy when the BoJ meets next week, the yen’s nightmare is unlikely to end soon. 

The dollar/yen chart points to a fierce battle for the 147 region, which was the reversal point almost a quarter century ago. For the tide to turn, it would require the interest rate chasm between the BoJ and Fed to stop widening, either through a BoJ pivot or with the Fed’s tightening cycle coming to an end. 

Euro recovers, dollar pulls back

The wind of change seems to be blowing for euro/dollar, which has gained almost 3% over the last four trading sessions to escape the parity dungeon. European governments finally seem ready to intervene in the energy market by capping power prices for households, taking some of the burden off the consumer and putting it on the shoulders of the state. 

Meanwhile, the ECB has decided to defend the single currency by rolling out a three-quarter point rate increase last week to stop the bleeding, and the pendulum in the war has started to swing in Ukraine’s favor after the latest counter-offensive. All of these factors have joined forces to engineer a short squeeze in the euro.

On the opposite side of the coin, the US dollar is taking a breather after going on a rampage this year. Of course, not much has changed. The Fed continues to outgun other central banks, there is a lack of viable alternatives in the FX space, and safe-haven flows are unlikely to dry up anytime soon. Watch out for the latest US inflation report tomorrow, which will decide how hard the Fed will strike at next week’s meeting. 

Stock markets cheer up

Equity markets enjoyed some relief last week, with the S&P 500 gaining nearly 3.5% to snap a three-week losing streak as the prospect of a less-severe energy crisis in Europe overshadowed the introduction of fresh lockdowns in China.  

That said, the near-term path for stocks remains rocky. Central banks spearheaded by the Fed are hell-bent on keeping rates high until inflation is squashed, the pace of quantitative tightening doubled up this month, valuations are still not cheap, and earnings downgrades are increasingly realistic amid the twin storms in Europe and China. 

As for today, the economic calendar is low-key, with only a speech by ECB board member Schnabel at 12:00 GMT on the schedule. 

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