Market news

Headlines

*Yen slips past 150 against the dollar, lowest level since 1990

*Japanese inflation rises to 8-year high on weak yen and energy costs

*US stocks give up gains as Treasury yields hit new highs

*GBP slides as risks rise on possible general election

FX: USD rebounded again after dipping below the 21-day SMA at 112.61. The US 10-year Treasury yield pushed further north up to levels last seen in June 2008 at 4.23%.  The 10-year real rate closed at a new cycle high of 1.72%, the highest level since 2009.

GBP/USD continued to close below trendline resistance from the August highs. Political infighting and the uncertainty around leadership is still seeing investors demanding a risk premium for the pound. EUR/GBP popped up above 0.8721 previous resistance. EUR failed to benefit from falling gas prices and closed near its lows around 0.9770.  USD/JPY hit new cycle highs at 150.28. The yen has fallen more than 23% year-to-date.

NZD/USD and AUD/USD remain weak after again failing to close above resistance at 0.6363. Gold is stuck near three-week lows with key support around $1614/17.

Stocks: US equities closed lower for a second straight day, reversing gains from earlier in the week. The S&P closed down 0.8% and the Nasdaq 100 gave up 0.8% while the Dow lost 0.3%. Tesla fell 6.7% after its revenues fell short of expectations for the most recent quarter. IBM had lifted stocks as it posted better than expected Q3 earnings.

Asian stocks have opened lower in Japan.The Hang Seng index hit it slowest level in 13 years on Thursday.  S&P 500 futures are pointing to more losses to end the week. The 21-day SMA sits at 3671. The mid-June low is initial support at 3636.

Event Takeaway – Higher Fed funds rate

Rates have moved materially higher since last week and the latest US inflation data. The peak rate, or “terminal” rate, is now expected to hit 5% in May next year. This has increased from 4.6% before those US CPI figures. The September consumer price index showed a big rise in monthly price pressures which was broad-based.

A fourth straight 75bp rate hike is fully priced in for the early November meeting. Another similar sized move for the last meeting in mid-December is now given a 75% chance. This would bring rates to a new target range of 4.5% to 4.75%. With these rises, financial stability concerns become more elevated. This means the Fed may be at risk of not meeting the market expectations. But in the meantime, it is going to take a lot to conclude that the Fed tightening cycle is over. The dollar will remain supported in this environment.

Chart of the Day – USD/JPY to new highs

USD/JPY rose above 150 for the first time since 1990. The yen is the worst major performing currency this week and is the only one down versus the dollar.  As US real yields have gone higher, the widening differences in yield between the Us and Japan have rocketed. The BoJ remains committed to their yield curve control policy which keeps Japanese government bond yields at just above 0.25%. Unless the fundamentals start pulling in the same direction, it is tough to change the current direction of travel with a hawkish Fed and the uber-dovish BoJ.

The August 1998 high at 147.67 should act as initial support. We are obviously in elevated territory with the pair overbought on several timeframes. Intervention risks are rising. But again, as we have said unilateral intervention is very tough to pull off successfully.