An ING analysis says the recent yen rally relies on optimistic bets about tightening and GPIF changes, and was probably exacerbated by thin liquidity around a US holiday. It expresses doubt that the move can be sustainable beyond the near term, but says it still looks too risky to catch the falling yen. The analysis adds that broader sentiment remains affected, but has room to improve.
Yen moves have dominated the start of the week. Thin liquidity around the US holiday likely amplified the USD/JPY sell-off, pushing the pair through the key 155.0 level before extending to 153.0 overnight. The note characterizes the move as primarily a yen story rather than evidence of a broader shift in sentiment toward the dollar. It says short-term positioning appears increasingly focused on a hawkish Bank of Japan and on GPIF increasing domestic ownership.
Despite short-term fundamentals suggesting the move is overdone, the analysis says it remains risky to stand in its way, particularly given the scope for further carry-trade unwinding. The next meaningful support is identified at 152.0, where the yen rally stalled in January and February. A break below that level could quickly open the way toward 150.0, although whether such a move would prove sustainable remains an open question. Current volatility, it says, argues against trying to catch the falling knife.
The yen rally is also spilling over into broader dollar weakness, even as the wider dollar narrative remains unresolved. Elevated energy prices, with oil close to $100 a barrel, remain supportive, yet markets are still pricing only around 15 basis points of tightening for September and risk sentiment has held up well. US equity futures point to a softer reopening, which could lend the dollar some support against an otherwise empty calendar. The analysis continues to see the bullish case for the dollar as stronger in the near term, although Friday's US release remains a clear risk event.
For the euro, the analysis points to downside risks. Second-quarter eurozone growth was revised up from 0.4% to 0.6% quarter-on-quarter, driven by stronger Irish growth on the back of robust multinational performance. It says Europe's resilience despite geopolitical developments and higher commodity prices has been a key theme of the summer and has likely helped keep the euro relatively expensive. The short-term downside preference is mainly driven by the analysis's dollar view and expectation of a September Fed hike, while the latest rise in energy prices adds further support. Real-time estimates suggest the eurozone's commodity terms of trade are now worse than at the previous low in March. Ahead of Thursday's ECB meeting, the analysis sees some dovish risks given aggressive market tightening expectations and says a move toward 1.150 remains realistic over the coming weeks.
For sterling, the analysis says the currency had a decent session, with some marginal support potentially coming from Chancellor John Healey's first major speech. It says he delivered a firm message on fiscal discipline, helping to keep the increase in long-end gilt yields broadly in line with the wider global bond sell-off. That stance is likely intended to reassure markets ahead of what could be a steady flow of headlines about the October budget in the weeks ahead. How far those headlines test the market remains to be seen. Sterling is currently pricing in no fiscal risk premium, leaving room for market concern to emerge. Even so, the government appears highly conscious of market sensitivities and unlikely to engage in a serious confrontation with the bond market, particularly given how quickly higher yields can consume any available fiscal headroom. The analysis retains a positive bias for sterling, primarily due to its assessment that Bank of England expectations appear way too hawkish.
