The Fed feeds recession fears, Japan intervenes in support of the yen

  • The Fed surprises with aggressive hike projections
  • Japan intervenes in FX when the dollar / yen rises above 145
  • Central bank bonanza with the rise of the UK, Switzerland and Norway

LONDON, Sept. 22 (Reuters) – World stock exchanges were close to a two-year low on Thursday, and Japan was forced to unilaterally intervene in currency markets for the first time since 1998, after aggressive US rate hike signals. The Federal Reserve had put the markets in crisis.

In Europe, where all the economic pain and volatility was amplified this week by the Russian threat to use nuclear weapons, major equity markets (.FTSE), (.GDAXI), (.FCHI) plunged more than 1% before finding support (.STOXX).

It had been a roller coaster from the start. Tokyo stepped in to support the yen not long after Europe opened. Even though the move seemed to be coming for weeks – the yen fell 20% this year, nearly half of that in the past six weeks – it still scored a hit.

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Traders have seen the Japanese currency climb to 142.39 from 145.81 to the dollar in the space of a few minutes and hit 140 per greenback before running out of gas. / FRX

With the dollar suddenly stalling, the euro has risen nearly 0.5% from its 20-year low. The pound, which is not far behind the yen which has lost more than 8% since August, was also lifted from a low in 1985 when the Bank of England raised its rates by another 50 basis points. read more / FRX

“We have taken decisive action (in the foreign exchange market),” Japan’s Deputy Finance Minister for International Affairs Masato Kanda told reporters after the speeches. Read more

The move came just hours after the BOJ had kept interest rates very low, fighting the global tide of monetary tightening by the Fed and others trying to curb inflation.

Asian equities fainted overnight to a two-year low after Fed rate hikes and GDP forecast cuts triggered a brutal ending on Wall Street, though S&P futures indicated a modest rebound thereafter.

“The Fed is delivering exactly what it said it would do (with rate hikes), but the markets have shifted the interest rate path quite a bit,” said Robert Alster, Chief Investment Officer of Close Brothers Asset Management.

“Suddenly we enter a scenario where everything stretches a lot more … It’s a bit disconcerting in some respects, but at least they have mapped out the roadmap and we know the economy is second to monetary policy.

Wall Street should have risen when it reopens, but the benchmark S&P 500 is now less than 4% from its mid-June low, its weakest point of the year.

In the interest rate market, short-term yields remain higher and the peak of the benchmark Fed fund rate is a moving target.

The Fed officials’ median outlook has US rates at 4.4% by the end of the year – 100 basis points higher than their June projection – and even higher, at 4.6%, by the end of the year. 2023.

Futures have climbed to recover. The two-year Treasury yield reached a 15-year high of 4.13% in Asia before falling back to 4.10% in Europe.

Ten-year yields are lower, at 3.54%, as traders discount the damage of increases to long-term growth. In Europe, the yield on Germany’s rate-sensitive 2-year bonds rose to 1.897%, the highest since May 2011.

“Nobody knows if this process will lead to a recession or, if so, how significant that recession would be,” Fed Chairman Jerome Powell told reporters after the rate hike was announced.

“The chances of a soft landing are likely to decrease as the policy has to be more tight or restrictive for longer.”

Yen sees a historic decline

FOLLOW THE FED

The Swiss National Bank also raised rates by 0.75 percentage points, only the second increase in 15 years that also ended its 7.5-year period of negative interest rates. Read more

Previously, Swiss rates had been frozen to minus 0.75% as the SNB tried to tame the appreciation of the Swiss franc, but Thursday’s message was to the contrary, that in the current environment, further hikes and intervention on the bank might be needed. exchange.

“To provide adequate monetary conditions, the SNB is also willing to be active in the foreign exchange market if necessary,” he added, pushing the franc up more than 1%.

The global outlook is helping to push the dollar higher as US yields look attractive and investors think other economies look too fragile to support rates as high as those contemplated in the US

Japan and China are outliers, and their currencies are slipping particularly strong: the yen had fallen to the weaker side of 145 per dollar on Thursday before the Tokyo intervention after the Bank of Japan adhered to its ultra-monetary policy. easy. Read more

Yields in the Japanese government bond market also fell as speculators closed some bets on upcoming political changes.

Back in Europe, Norway and the UK raised rates by 50bps and traders also saw many more on the way.

Not that it’s very beneficial for the region’s currencies.

The modest rise in the pound came after hitting a 37-year low of $ 1.1213 overnight due to growing concerns over the state of British finances. The Swedish krona also hit an all-time low despite the country’s strongest rate hike in a generation earlier this week.

The rise in the dollar has also brought down emerging market currencies and punished cryptocurrencies and commodities.

Lira traders were startled again when Turkey, where inflation is now around 85%, defied economic orthodoxy and cut its interest rates by another 100 basis points.

Spot gold fell 0.3% near its two-year low at $ 1,668 an ounce. Bitcoin was just above $ 19,000 and Brent crude stabilized at $ 90.33 a barrel after slipping due to concerns over demand.

“The more aggressive the Fed becomes, the more likely it is that market volatility will be high and the risk of a recession increases,” said Gautam Khanna, Head of US Multi Sector Fixed Income at Insight Investment.

Reuters graphics

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Additional Reporting by Tom Westbrook in Sydney; Editing by Frank Jack Daniel, Alexander Smith and David Evans

Our Standards: Thomson Reuters Trust Principles.

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