Dollar shrugs off suspected yen intervention, Europe clings to Fed hopes

LONDON/SYDNEY, Oct 24 (Reuters) – The dollar weathered another suspected burst of Japanese intervention to rally against the yen on Monday, while European markets got a boost from hopes that U.S. interest rates could rise more slowly than previously thought.

The dollar roared to 149.70 yen in early trade before quickly retreating to 145.28 within minutes in what traders and analysts said appeared to be in the hands of the Bank of Japan. It was last down almost 1% to 149.24.

The Financial Times reported that the BOJ may have sold at least $30 billion on Friday to try to protect the yen from further weakness, which has sharply raised the cost of Japan’s imports, especially resources.

Japanese authorities again refused to confirm whether they had intervened, but the price action suggested they had.

Any move to support the yen runs counter to the BOJ’s commitment to control Japanese government borrowing costs and could increase pressure on it to return to yield curve controls at its policy meeting this week.

Sterling, meanwhile, was seen in volatile trading on news Boris Johnson had dropped out of the candidacy for British Prime Minister.

Former finance minister Rishi Sunak, who is the market’s preferred candidate, has emerged as the front-runner for the job, which could reduce some of the political uncertainty hanging over the pound.

The news initially saw sterling jump almost a cent to $1.1402, but it could not hold and last traded at $1.1328 as investors awaited more clarity on the competition. The leadership could potentially be decided later on Monday if Sunak becomes the only candidate to secure the minimum number of MPs’ votes required to advance.

“The day-to-day is difficult. My favorite expression of all this morning is that this is a time to be a poker player, not a chess player. It’s about positioning and sentiment and understanding who you’re playing against,” Societe Generale strategist Kit Juckes said.

Stocks mostly extended the bounce that began late in New York on Friday after a call as the Federal Reserve discussed when to slow the pace of gains and could signal a step back at its November meeting.

Markets are still priced for a 75 basis point increase next month, but have scaled back bets on a matching move in December. The peak for rates has also dropped to around 4.87%, from over 5% early last week.

ECB, BoC SET TO HIGH

Shares in Europe opened on a positive note, with the STOXX 600 up 0.7% on the day, ahead of a week of packed earnings, as 118 companies, including big guns such as HSBC ( HSBA.L ), Unilever ( ULVR.L ) and TotalEnergies (TTEF.PA) is set to report.

Chinese blue chips (.CSI300) tumbled nearly 3%, while the offshore yuan hit another record low against the dollar after Xi Jinping secured an unprecedented third term in office, electing a top governing body stacked with loyalists. Xi is likely to stick to his zero-covid policies that are hurting growth, analysts say.

Delayed gross domestic product (GDP) data showed the Chinese economy grew 3.9% in the third quarter, above forecasts for 3.5%, but retail sales disappointed, with an increase of 2.5%.

The markets are now awaiting figures on US GDP due on Thursday and core inflation measures the following day. The economy is forecast to have grown at a 2.1% annual rate in the third quarter, while the Atlanta Fed GDP Now indicator rose to 2.9% last week, from 2.8%.

Sentiment will also be tested by some big earnings with Apple ( AAPL.O ), Microsoft ( MSFT.O ), Google parent Alphabet ( GOOGL.O ) and Amazon ( AMZN.O ) all reporting.

The European Central Bank meets this week and is widely expected to raise interest rates by 75 basis points, although it is less clear whether it will signal a further such move in December.

“While we do not expect any ‘dovish’ policy signal, we maintain a bias towards a lower interest rate path than is currently priced in by the markets,” analysts at NatWest Markets said in a note.

“We forecast +50bp in December and +25bp in early 2023 to a peak of 2.25%,” they added. “There is more uncertainty around QT (quantitative tightening), where beginning sales in Q1 2023 could well be announced.”

The euro was a fraction at $0.9835, after hitting as high as $0.9899 early in the session.

The Bank of Canada is also expected to tighten by 75 basis points at its meeting this week.

The possibility of a slowdown in US rate hikes helped bonds pare some of the latest big losses, with US 10-year Treasury yields falling to 4.16% compared with a 15-year peak of 4.337% on Friday.

In commodity markets, gold was sidelined at $1,654 an ounce.

Oil prices rose early after soft data on Chinese demand. Brent retreated 42 cents to $93.08 a barrel, while US crude fell 41 cents to $84.64.

Reporting by Wayne Cole; Editing by Jacqueline Wong, Christopher Cushing and Susan Fenton

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