Powell confirms what’s largely priced – MUFG

The US Dollar (USD) has weakened a little further during the Asian trading session following the selling yesterday helped by growing optimism in France that PM Lecornu has done enough to avoid defeat in a government no-confidence motion and more importantly in response to comments from Fed Chair Powell who gave a speech on balance sheet policy. In the speech to the National Association for Business Economics Powell was clear that labour market risks were to the downside given the economy was ‘at a place where further declines in job openings might very well show up in unemployment’, MUFG’s FX analyst Derek Halpenny reports.

Yen is the top performing G10 currency today

“The comment puts to rest the idea that the government shutdown, in creating an information vacuum, could result in the FOMC deciding to hold off on cutting rates. But the OIS market has indicated a 25bp cut on 29th October has been close to fully priced since the start of October and hence the UST bond yield impact was marginal. Markets were less clear on balance sheet policy though and Powell gave a strong hint that QT would end in the coming months given the indications of some tightening in liquidity conditions – Powell did not want to see a repeat of tighter liquidity conditions that took place in 2019.”

“That hint did help lower longer-term yields but the 10-year remains at just above 4.00% and you get the sense that something significant will be required in order to give market participants the conviction to buy 10-year bonds at yields below 4.00%. We shouldn’t dismiss the potential for a catalyst and the collapse of First Brands Group and Tricolor Holdings has had some reverberations in the credit space and an example like this, but on a bigger scale, would likely be that catalyst for a bigger yield drop and from an FX perspective would be a trigger for notable gains for both the yen and Swiss franc. The lead story in the FT today is on concerns being expressed over excessive leverage in the private capital industry that can be difficult to quantify.”

“The yen is the top performing G10 currency today but that’s from a position of being the worst performing since the start of October. That month-to-date performance of course reflects the ongoing political uncertainty. The uncertainty did not undermine today’s 20-year JGB auction however with a bid-to-cover of 3.56, above the 12mth average of 3.25. The LDP has proposed holding an election for PM in the Diet on 21st October but the three-party opposition talks on proposing their own candidate continue and hence did not agree to the date. The LDP suggesting the date points to confidence that they can win and we still see Sanae Takaichi as most likely to become PM. Closing the policy gaps amongst the opposition will remain difficult. While politics will remain a drag on yen performance, Fed rate cuts, the end of QT, and the potential for increased volatility will likely prove more important. So USD/JPY should still grind lower but the yen is likely to underperform within G10 until we get political clarity.”