FX Daily: Three central bank meetings, three currency responses

JPY interventions, UK mini-budget and SNB’s inflation fight
Group Research, Philip Wee23 Sep 2022
    Photo credit: Unsplash Photo

    JPY appreciated 0.5% to 142.39 on its first intervention since 1998. Vice Finance Minister Masato Kanda verified the government acted decisively against rapid and one-sided speculation against the JPY. The US Treasury Department (USTD) and the Swiss National Bank confirmed that there was no coordinated JPY action. Although it did not endorse the intervention, the USTD understood the motive to reduce excessive volatility in the JPY. Yesterday’s intervention upended the market’s attempt to push USD/JPY above the critical 145 level on the Bank of Japan’s decision to maintain loose monetary policy twelve hours after the Fed lifted its end-2022 projection for rates to 4.4% from 3.4%. USD/JPY bottomed at 140.36 during the New York session and has since trailed US bond yields higher to around 142.30, a sign that the JPY can’t shake off monetary policy divergences indefinitely.

    GBP depreciated 0.1% to 1.1261 after the Bank of England hiked 50 bps to 2.25%. BOE’s hike fell short of the Fed’s 75 bps hike a day earlier because it believed the UK economy might already be in recession. BOE now expects UK inflation to peak in October at just below 11% instead of 13%. However, the main event this week is Chancellor Kwasi Kwarteng’s mini-budget announcement today. Despite the support for the energy price cap to ease the cost-of-living crisis, investors consider Prime Minister Liz Truss’s tax cut plan to support growth as inflationary and putting the national debt on an unsustainable upward trajectory. Between the two BOE meetings on 4 August and 22 September, the 2Y Gilt yield surged to 3.53% from 1.85%. GBP is around a 37.5-year low and near a trendline support at 1.1040. Taking this out would open the door to the lifetime low of 1.05 in February 1985.

    CHF depreciated 1.2% to 0.9782 per USD after the Swiss National Bank hiked 75 bps to 0.50%and ended negative rates. CHF initially plunged 2% on markets reading too much into SNB President Thomas Jordan’s tribute to negative interest rates as a monetary policy tool the SNB will use again when it becomes necessary to fight deflation again. Yesterday’s hike was larger than the 50 bps rise in June and endorsed Jordan’s remarks at Jackson Hole about the risk of underestimating the persistence of inflation. To reinforce this point, Jordan left the door open for an unscheduled meeting, if needed, before its next meeting in December. Since July, USD/CHF has yet to demonstrate a resolve to push above 0.98 towards parity.

    Philip Wee

    Senior FX Strategist - G3 & Asia


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