Marketmind: Yen freefall

A look at the day ahead in U.S. and global markets from Mike Dolan.

Bad things tend to happen in world markets when Japan’s yen registers wild swings and its latest freefall against the supercharged U.S. dollar leaves many feeling uneasy.

With U.S. economic soundings still strong enough to keep the Federal Reserve talking tough on its inflation fight, the dollar continues to climb against major currencies where recession worries are more intense or – in the case of Japan – there’s no appetite to match monetary tightening elsewhere in the G7.

The Bank of Canada is expected to match recent Fed rate rises with a 75 basis point (bp) hike of its own later on Wednesday. The European Central Bank will also likely see that on Thursday and the Bank of England is shaping for a similar move next week – all before the Fed could pull the 75 bp trigger again later this month.

Japan stands alone in standing pat. Dollar/yen, now up more than 31% over 12 months, soared again over the past 24 hours to another 24 year high above 144, drawing official warnings in Tokyo about “rapid, one-sided” currency moves.

But for all the angst there appears to be little sign of any concrete action to halt the yen slide, now homing in on 1998’s trough above 147 per dollar. Former Japanese currency diplomat Hiroshi Watanabe told Reuters on Wednesday that Japan should not intervene or change monetary policy in response as they would be ineffective in countering broad dollar gains.

And as a barrage of Fed speakers hits the circuit again on Wednesday, including Vice Chair Lael Brainard, there appears to be no change in tack from the U.S. central bank either.

Richmond Fed President Thomas Barkin told the Financial Times more rate hikes were in store, positive real interest rates were a target and the Fed needed to keep rates high until it was convinced inflation was durably subsiding.

However resilient U.S. service sector business readings appeared last month, the world’s second largest economy is spluttering and China’s yuan is also under the cosh against the dollar – hitting another 2-year low on Wednesday.

Despite the yuan’s recent weakness, China’s export growth dropped sharply in August and well below forecasts – with heatwaves, drought and COVID lockdowns all having an impact. While imports of crude oil and other commodities fell, its overall trade surplus narrowed.

With Deutsche Bank chief executive Christian Sewing warning a German recession was now inevitable due to the Europe-wide energy crunch, the demand picture outside the United States is darkening by the day.

The only silver lining from global recession fears is that crude oil prices continue to fall back and dropped more than $1 at one point on Wednesday to their lowest since before Russia invaded Ukraine in February.

U.S. 2-year inflation expectations fell as a result, with 2-year inflation ‘breakevens’ from the index-linked Treasury market dropping to their lowest since February 2021.

Global stock markets were subdued. U.S. futures were mostly flat and U.S. Treasury yields off recent highs.

Bitcoin, now down almost 60% so far this year, fell below $19,000 for the first time since July.

Key developments that should provide more direction to U.S. markets later on Wednesday:

* Bank of Canada’s policy interest rate announcement

* Bank of England policymakers testify in parliament

* Fed Vice Chair Lael Brainard; Richmond Fed President Thomas Barkin; Cleveland Fed President Loretta Mester; and Federal Reserve Vice Chair for Supervision Michael Barr all speak

* Fed issues Beige Book of economic condition

(By Mike Dolan, editing by Mark Pottermike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)