Japanese Officials Declined to Confirm if Intervened

The Japanese yen has remained strong in overnight trading following a relatively turbulent session yesterday. The currency briefly climbed back above the 150.00 level and reached an intraday high of 150.16 against the US dollar before sharply dropping to an intraday low of 147.43. This sudden swing has led to speculation that Japan may have intervened in the foreign exchange market to support the yen, like what occurred in September and October of the previous year. However, it's worth noting that yesterday's price movement was less drastic compared to the significant swings seen on September 22nd and October 21st when USD/JPY experienced declines of 5.54 and 5.72 big figures, respectively, from their intraday highs to lows.

Finance Minister Suzuki mentioned earlier in the day that he wouldn't judge the possibility of foreign exchange intervention based on currency levels but rather on volatility. This stance may seem somewhat inconsistent with intervening to strengthen the yen just as USD/JPY broke above the 150.00 level. Japanese officials have not confirmed any intervention as of now. Chief currency official Kanda emphasized that they respond to excessive FX movements as always and haven't ruled out any options regarding foreign exchange. He met with Prime Minister Kishida to discuss the economy but did not specifically address foreign exchange matters. He also noted that it's normal not to announce intervention. Finance Minister Suzuki echoed a similar message, warning that they are closely monitoring foreign exchange with a high sense of urgency.

In summary, Japanese officials appear keen on keeping market participants alert to the possibility of intervention to slow down the rapid rise of USD/JPY. As seen last year, USD/JPY only began a sustained decline when US yields peaked concurrently with intervention. It's not yet clear whether the sell-off in the US Treasury market has reached its peak this time. The 10-year US Treasury yield has continued to rise this week, reaching a new cyclical high of 4.86%. In just over a month, it has surged by around 80 basis points, with the pace of the increase accelerating at the beginning of October. This move has been supported by recent evidence that the US economy remains resilient, although some believe the market reaction is somewhat exaggerated given the economic data.

The latest JOLTS report revealed a rebound in job openings to 9.61 million in August, marking the first increase after three consecutive months of declines. However, underlying trends in the report still suggest a slowdown in job openings, hiring, and quits, indicating weakening labour demand and less pressure on wage growth. Nevertheless, the US rate market has begun pricing in a slightly higher probability of one final Fed interest rate hike later this year, currently standing at approximately a 50:50 probability. The release of the non-farm payrolls report on Friday will likely be crucial in determining whether the US bond market sell-off and US dollar rally continue in the short term. Japanese officials may hope for a weaker jobs report to alleviate upward pressure on USD/JPY.

RBNZ adopts higher for longer rates mantra as well

During the recent Reserve Bank of New Zealand (RBNZ) policy meeting, the New Zealand dollar experienced a modest weakening. The NZD/USD exchange rate briefly dipped below the 0.5900 level, reaching an intraday low of 0.5871, while the AUD/NZD rate climbed back above the 1.0700 level. This initial market reaction suggests that the RBNZ's policy update wasn't as hawkish as anticipated leading up to the meeting.

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The RBNZ decided to keep interest rates on hold for the third consecutive meeting at 5.50%. The primary change in the policy statement was the introduction of guidance indicating that "the Committee agreed that interest rates may need to remain at a restrictive level for a more sustained period of time." This aligns with similar communication from other G10 central banks like the ECB and the Fed, which have signalled the possibility of keeping rates at elevated levels for an extended duration.

The New Zealand rate market has interpreted this updated guidance as a signal that the RBNZ may opt to maintain rates at their current levels for a longer period, although it does not completely rule out the potential for future rate hikes. Factors such as robust GDP growth, the avoidance of a recession in New Zealand's economy during the first half of the year, a tight labour market, and the recent increase in oil prices have all contributed to upward risks in the short-term inflation outlook. This could potentially lead to another rate hike after the upcoming election scheduled for October 14th. Key data releases, including the Q3 CPI report on October 17th, will play a vital role in determining whether the RBNZ chooses to implement further rate hikes or extend the period of rate stability.

Over the past week, the New Zealand dollar, along with other G10 commodity currencies, has faced selling pressure as global yields continue to adjust sharply. This adjustment is beginning to negatively impact commodity prices and other risk assets, contributing to the recent challenges faced by these currencies.

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