Yen under pressure, down to 36 year low

The Euro came under pressure yesterday and dipped below $1.07 to the dollar. However, it’s holding up above the $1.0680 support level and continues to trade in a fairly narrow range that it has been in for almost the past two weeks. It’s a fairly similar situation against sterling, with the Euro continuing to trading in an 84p range. The bigger story yesterday was yen weakness which saw the dollar break though Y160 and to its highest level against the Japanese currency since late 1986. This has prompted much market speculation that the Japanese authorities may intervene to prop up their currency.

The yen declined to a 36 year low to the dollar yesterday and is trading at Y160.4 at the moment. This is a weaker level than in April when the Japanese authorities intervened to support the currency. Since then the Yen has remained under pressure given the huge gap between its interest rates where the Bank of Japan hold the key rate at virtually zero and the prevailing interest rates in most major economies such as the US where the Fed’s key rate is at 5.25% to 5.5%. This depreciation is hitting Japanese consumers and raising the price of imports. The Japanese Finance Ministry appears to be limiting its actions to verbal support, for now, saying that they are watching the situation closely and stand ready to act but has not said the latest moves are excessive. The difficulty is intervention, by its nature, will cost the Bank of Japan a huge amount of foreign currency and may only slow the Yen’s slide. It also risks annoying its trading partners, notably the US, as foreign currency intervention is generally regarded as only for use in exceptional and limited circumstances.

In the US there was some poor data on the housing front. The ‘higher for longer’ scenario that has played out this year for the Fed has put the housing market on the back foot. Data yesterday showed that US new home sales fell 11.3% month-on-month in May to an annual rate of 619,000, the lowest since November of last year. With 30-year mortgage rates at just below 7%, more than double where they were at the start of 2022, the market is likely to remain under pressure. Moreover, the stock of new homes for sale rose to 481,000 in May, the highest its been since the aftermath of the financial crisis in 2008. Almost 100,000 of those are already completed and seeking a buyer, a bad sign for the market. This backlog could take 9 months or more to run down at current sales rates and could cause builders to shift down to a lower gear and slow activity until interest rates come back down and the housing market heats up.

There were a number of ECB speakers yesterday, but all were saying much the same thing – that there is likely to be further  rate cuts, but moves will be gradual and data dependent. Bank of Italy Governor Panetta said that normalisation (of rates) is data dependent but services inflation stickiness was ‘not abnormal’ and the path of headline inflation, not the components was key. Bank of Latvia Governor Kazaks said that there was no rush but rate cuts would come ‘step by step’ while chief economist Philip Lane said under the ECB current baseline ‘more cuts can be expected over time’.

Economic data due today includes Euro Area consumer and business confidence and in the US, durable goods orders and pending home sales as well as another estimate of Q1 GDP.