The JPY has stabilized post the BOJ meeting yesterday, with markets reassessing the pace of policy normalization in Japan. After sustained upward momentum for a month, USD/JPY has eased from mid-153 levels to 152 post-BOJ. Governor Ueda underscored yesterday that rate hikes will come if the economic and price outlooks are realized, while also expressing concerns about the impact of exchange rates on inflation, given possible changes in price-setting behaviour. Japan’s economic situation has not changed much since early Oct when PM Ishiba stated that Japan is not ready for a rate hike, but subsequent JPY losses have likely prodded the BOJ to signal more confidence in policy normalization, which should support the JPY. Meanwhile, PM Ishiba is wooing smaller political parties to support his government, after his coalition failed to secure a majority in the Lower House.
USD/CNH has eased towards 7.12 from touching 7.16 earlier this week. RMB sentiment is supported by a few factors, including a recovery in China’s manufacturing PMI to 50.1 in Oct (and the first expansionary read since April), as well as firm equity sentiment, with Chinese equities still up by over 20% compared to their Sep low despite slower momentum. The most important development is that market expectations around fiscal stimulus have risen. Media reports indicate that China’s Standing Committee of the NPC may approve the issuance of over CNY 10trn (USD 1.4trn) of extra debt in its meeting to be held from 4-8 Nov. This could include CNY 6trn of special sovereign bond issuance to be raised over 2024-2026, and which would be used to help local governments address their debt risks. An alleviation of growth and financial risks with fiscal support should support the RMB, given China’s ample fiscal space.
Entering November, FX markets and the USD are also bracing for the outcome of US elections next week. The USD has been a beneficiary of Trump’s momentum in the polls, with the DXY having risen by over 3% from end Sep to trade near 104, alongside higher US Treasury yields. With election positioning likely done by now, the USD could hover at current levels into election night. Meanwhile, US non-farm payrolls tonight will be noisy given the impact of weather and a large-scale strike, and thus may not have a large impact on the USD, particularly given its proximity to elections.
Quote of the Day
“I was an underdog my whole career, but I knew I had the ability to beat those guys."
Buster Douglas
November 1 in history
In 1938, Seabiscuit beat the “invincible” War Admiral in a renowned horserace known as the “Match of the Century”.
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