Tom Westbrook’s day-ahead outlook for European and global markets
Liquidity in the yen was thin on Tuesday as Tokyo traders returned from a three-day holiday weekend and did not climb back into the strong $140 range, where it briefly stood on Monday.
But the USD/JPY pair – and the 140 milestone – is in the headlines this week , with the Federal Reserve expected to begin a US easing cycle and the Bank of Japan plotting a path for rate hikes.
Market pricing for a massive 50 basis point interest rate hike by the Federal Reserve on Wednesday rose to 67% on Tuesday, up from 30% a week ago.
The yen hit a 38-year low against the dollar in early July but has been rallying since then, gaining more than 12% as the gap between U.S. and Japanese two-year rates has narrowed by about 130 basis points in 11 weeks.
If a dovish Fed or an accommodative Bank of Japan pushes the yen firmly above 140, the yen could rise further against the dollar, opening the way to an attack on last January’s peak of 127.215 yen against the dollar.
That would push the yen above corporate assumptions for the exchange rate level this fiscal year, turning it into a buyer and adding to already struggling momentum.Japanese shares were cautious, with the Nikkei (.N225) down 1.7%.
Ahead of the Fed, the German confidence survey (DEZEWS=ECI) released on Tuesday is expected to show a slight decline this month, and US retail sales (USRSL=ECI) are expected to have fallen on a quarterly basis in August.
Markets will likely ignore the numbers and focus on forward guidance as a guide to the size of the expected US interest rate cut this week, the reasons for the cut, and how the economic situation will be in the coming weeks and months.
A research arm of BlackRock, the world’s largest asset manager, believes the economy’s resilience will allow for a lower rate cut than the 250 basis points that traders expect over the next 12 months.
Elsewhere in Asia, Australia’s benchmark ASX 200 (.AXJO) hit a record high, while Chinese home appliance maker Midea surged 9.5% in its first trade in Hong Kong. Markets in mainland China were closed for holidays.
Key developments that could impact markets on Tuesday:
Economy: German sentiment survey, US retail sales, Canadian CPI
