USD/JPY plunged for a second day, dragging the USD lower across the G10 currencies. The 1.9% overnight decline was twice Wednesday’s 0.9% fall. Thursday’s intra-day low of 155.30 low approached the 157.20 low seen after the joint US-Japan interventions in late July. USD/JPY eventually closed at 155.80, its lowest level since the days leading up to Operation Epic Fury on February 28.
The primary catalyst behind the JPY’s rebound was an aggressive repricing of a Bank of Japan rate hike. US Treasury Secretary Scott Bessent expressed support for decisive Japanese policy tightening during a meeting with BOJ Governor Kazuo Ueda. Separately, hawkish BOJ board member Hajime Takata did not rule out back-to-back rate hikes, including moves larger than 25 bps increases, to tackle inflation pressures. Together, these developments reinforced expectations for further BOJ tightening and fuelled speculation about another round of joint intervention, particularly as the prospect of a September Fed hike becomes divided again.
The market pricing for a Fed hike at the September 16 FOMC meeting also tumbled to 52% overnight from a high of 68% on Tuesday. Fed Governor Christopher Waller said he did not favour hiking into disinflation unless the August CPI report challenged his assessment that underlying inflation was softer than the headline data suggested. New York Fed President John Williams also maintained that interest rates were in a good place as inflation continued to ease. William estimated the neutral rate at around 1%, well below the current 3.50-3.75% Fed Funds target range.
Given the Fed’s emphasis on inflation itself, today’s US nonfarm payrolls have less influence on the FOMC’s decision than the August CPI report due on September 11. While NFP captures the initial attention of traders, Fed officials have emphasized the unemployment rate when assessing the health of the US labour market. Many Fed officials have characterized employment conditions as stable and close to sustainable levels within a “low-hire, low-fire” environment. Between May and July, the unemployment rate declined from 4.3% to 4.1%, even as NFP deteriorated from 63k to -23k.
Nonetheless, after the USD’s heavy losses this week, traders may be reluctant to increase bearish positions into the extended three-day US Labor Day weekend. Profit-taking could become more tempting given the potential for geopolitical developments to shift rapidly while US markets are closed.
Additionally, Germany’s Saxony-Anhalt state election on Sunday, September 6, could jolt the EUR. The Alternative for Germany (AfD) could be the first far-right party to lead a German state government. To achieve this, the AfD needs to secure an outright majority of seats to overcome Brandmauer, or a firewall by mainstream parties refusing to enter coalitions with the AfD. According to recent polls, AfD is polling around 40-43%, well ahead of CDU’s 22-23%. The minor parties also need to fall short of the 5% vote threshold needed to secure parliamentary seats. Markets typically react to an AfD surprise victory with a knee-jerk EUR sell-off because of its platform centred on hardline nationalism, anti-immigration, Euroscepticism, support for Russia, and an anti-interventionist stance on the war in Ukraine.
Quote of the Day
“You push the button, we do the rest.”
George Eastman
Today in history
On September 4, 1888, George Eastman received U.S. Patent No. 388,850 for his roll-film hand camera and registered the trademark "Kodak".
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