(Bloomberg) — Traders are preparing for a choppy start to the week after US and European policymakers signaled that interest rates are likely to stay higher for longer at their annual conference in Jackson Hole.
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The Japanese yen will be in focus when the currency markets reopen at 5am in Sydney. The currency fell to its weakest level this year against the dollar as Federal Reserve Chairman Jerome Powell indicated that the US may raise interest rates again, boosting yields on short-term Treasury notes. Australian bonds will give an early indication of whether yields in Asia will follow suit.
Investors are also digesting China’s recent efforts to prop up its stock market.
In a speech Friday at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming, Powell said the Fed is “willing to raise interest rates further if appropriate,” even as he asserted that monetary policy would continue to shape it. through economic data. Meanwhile, European Central Bank President Christine Lagarde pledged to set borrowing costs at the highest level required and leave them there until inflation returns to its target.
Treasurys fell after Powell’s comments, sending yields on the policy-sensitive 2-year note up to 5.09%, while the real yield on the 5-year note rose to its highest level since 2008. The yen broke through to its lowest level in a year to date for trading. Near $147 to the dollar, which renews questions about whether Japan can intervene to support the currency. Stocks closed higher.
“Powell clearly and deliberately repeats the macroeconomic case for the Fed’s hawkish policy-making bias goes a long way toward confirming the higher turnaround in Treasury yields over the past two months,” Citi economists Andrew Hollenhorst and Veronica Clark wrote after Powell’s speech.
Powell indicates that the Fed will raise interest rates if needed, and keep them high
Such dialogue surrounding the Fed stands in stark contrast to the Bank of Japan and the People’s Bank of China.
Chinese officials have steadily intervened to support the yuan, and Japanese authorities have indicated that they are watching the yen’s movements closely.
Speaking in Jackson Hole on Saturday, Bank of Japan Governor Kazuo Ueda did not comment on foreign exchange rates, but said that rate growth remains slower than the central bank’s target, explaining why officials will stick to their current monetary policy.
So far, Asian currencies are down 2% against the dollar this month, according to a Bloomberg barometer. The yuan fell 2% and recently fell to its weakest level in nine months as expectations grow for the world’s second largest economy.
And while Sunday’s data showed China’s industrial profit decline eased in July, the slowdown in economic recovery and deflationary risks still weigh on the sector. China also announced measures to support the stock market, lowering stamp duties on stock trading for the first time since 2008, and vowing to slow the pace of initial public offerings.
“We are likely to see stronger intervention in the renminbi and we may see some verbal intervention in the yen,” said Ed El Husseiny, global interest rate strategist at Columbia Threadneedle Investments in New York. “Both things have been going on this year, neither of them is new, but both the yen and the renminbi will come under a lot of pressure.”
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The yuan could come under pressure against the dollar amid multiple headwinds – including a negative carry against the dollar, a peaking trade surplus, and normalization of tourism outflows. China could increase its support of the currency, but this may at best slow the yuan’s decline but will not reverse the trend, until the Fed turns dovish and macro data in China improves.
— Stephen Qiu, BI’s chief foreign exchange and interest rate analyst in Asia, with contributing analyst Chunyu Zhang
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The Fed’s hawkish stance may also add to the pain of regional stocks, as the MSCI Asian stock index is already on track to post its biggest monthly drop in almost a year.
Global funds have withdrawn about $5.9 billion from emerging Asian stocks, excluding China, so far in August, according to data compiled by Bloomberg.
In Asia, said Toshiya Matswami, a strategist at Nissay Asset Management in Tokyo: “High-tech stocks will be at risk if the US bond yield rises to around 4.5%.” The benchmark 10-year Treasury currently yields around 4.25%. “Companies that make chips for computers and smartphones are going to be in a tough spot.”
– With the help of Hideyuki Sano.
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