Bank Of Japan Hikes And Yen Tumbles

The US dollar is narrowly mixed against most of the G10 currencies. The notable exception is the Japanese yen, which is around 1.25% lower today. To be sure, the Bank of Japan lifted its overnight rate, as widely expected, and Governor Ueda seemed to signal a faster pace on policy adjustment. Still, the decision was made on a 7-2 vote, and the odds of a December move were trimmed, though still above 80%. Meanwhile, the PBOC continued to signal acceptance of a stronger yuan and fixed the dollar lower for the eighth consecutive session, and to a new three-year low. President Trump and Xi meet next week but other issues than foreign exchange, like trade, AI, and the war in Iran are arguably more salient. 

Two German states hold elections this weekend and the AfD is running strong in one. Coalitions take time to work out and the election a couple of weeks ago in Saxony-Anhalt has not yet resulted in a new government, which could take another week. 

Prices 

G10

• The euro consolidated yesterday in about a half-of-a-cent range below $1.15. Although it rose for the first time in six sessions, the gains were subdued. It is trading quietly today in less than a quarter-cent range below $1.15, where options for nearly 2.2 bln euros expire today. 

• After the widely expected BOJ rate hike the dollar jumped to JPY158 after it settled below JPY156 yesterday. The dollar fell against the Japanese yen yesterday for the first time this week. The 10-year US Treasury yield snapped a seven-session advance yesterday, falling eight basis points. That was its largest decline in nearly three months. The 200-day moving average is near JPY158.40, which is also around the (50%) retracement of the dollar’s losses since the late July highs. The rolling 30-day correlation between the change in Japanese two-year rates and the dollar-yen exchange rate has been mostly positive since the end of Q1 but is now slightly inverse (~-0.05). This suggests that even having “asymmetrical information” on the outcome of today’s BOJ meeting, say at the end of July, would not be particularly helpful in forecasting the exchange rate. 

• Sterling was independently weak yesterday. It slipped on the BOE announcement but recovered to almost $1.34 before sellers took it to almost $1.3335, its lowest level since late July. The (61.8%) retracement of sterling’s rally from the year’s low (~$1.3140) seen in late June was around $1.3345. Sterling stabilized today and is consolidating in about a quarter-of-a-cent range above $1.3350, drawing mild support from the stronger than expected retail sales report. 

• The Canadian dollar was sold to a marginal new low since early August yesterday. The US dollar initially extended its six-day rally to slightly above CAD1.40. It settled below the figure, and little changed on the day. The greenback is still firm and continues to probe the CAD1.40 level. The next technical target is around CAD1.4050. The US two-year premium over Canda widened yesterday for the fourth time in five sessions and frayed 140 bp for the first time since late July. 

• The Australian dollar rose yesterday for the first time this week. However, it held below Wednesday’s high (~$0.7140) and remains below there today. A move above there could spur a move toward $0.7165. 

EM 

• The Mexican peso bottomed yesterday at its lowest level since August 4. It recovered and rose for the first time this week. The gains seemed muted, but it was the strongest in the region yesterday. The dollar is trading quietly between about MXN17.1350 and MXN17.1745 today. The Brazilian real fell for the fifth consecutive session. The Colombian peso was the weakest in the region yesterday, losing a little more than 1%. The four-day losing streak coming into today follows a nine-day rally, which itself followed a six-day slide. 

• The dollar has fallen to a four-year low against the offshore yuan today to CNH6.6935. It settled at CNH6.7080 last week. The PBOC has been aggressively setting the dollar’s reference rate lower. On September 8, the dollar’s fix was a little above CNY6.78. At the start of this week, it was set slightly below CNY6.77 and today’s fix was CNY6.7521 (from CNY6.7580 yesterday). It is the fifth consecutive weekly decline in the fix, which has risen in only two weeks since the end of H1. 

• The dollar gapped lower against the Indian rupee (~INR95.72) but gradually recovered to INR95.9050. It settled slightly above INR95.87. The dollar rose by about 0.35% this week, its second weekly advance after slipping the previous two weeks. 

Other Markets

• Equities in the Asia Pacific region mostly extended yesterday’s gains, encouraged by the firm showing of the major US benchmarks. Japanese stocks were mixed and Australia’s index slipped, but most of the other large markets in the region advanced. Europe’s Stoxx 600 is giving back about half of yesterday’s 0.85% gain, and US index futures are slightly firmer. 

• Benchmark 10-year yields fell yesterday, arguably helped by the decline in oil prices and the recovery in US Treasuries after Wednesday’s slide. Most European yields are off 2-3 bp, but the UK 10-year Gilt fell by nearly 7.5 bp and the 10-year US Treasury yield fell seven basis points to 4.95%. It settled slightly below 4.97% last week. The US two-year yield fell yesterday for the first time since September 3. The two-year yield is still up about five basis points this week. Asia Pacific rates benchmark 10-year yields softened today, including the JGB yield, which slipped by a basis point. European yields are 3-6 bp higher. The 10-year US Treasury yield is up nearly 3 bp to almost 4.96%. The two-year yield is up almost five basis points to slightly above 4.71%. 

• Gold rose by about 1.8% yesterday, its biggest advance in a couple of weeks. It was the first gain of the week. Follow-through buying lifted it to almost $4400 today. A move above the $4432-$4445 area lifts the technical tone. Silver rose by about 3.6% yesterday. It frayed the 20-day moving average (~$66 today). Buying today has lifted silver above the trendline connecting the late August and early September highs (~$66.10 today) and reached nearly $67.35. 

• October WTI traded below $100 a barrel yesterday for the first time this week on news that Saudi Arabia was re-opening and key pipelines and Reuters reported that Beijing asked Iran for help to curb the Houthis, who appear to have established control of the Bab el-Mandeb Strait. However, the price trended higher through the North American afternoon and reached almost $102.50 before it settled slightly below $102. It is consolidating quietly today between about $99.40 and $101.65. A close today above $100.05 would be the third consecutive weekly gain. 

Data

• The Bloomberg US economic data surprise index reached a six-month low at the end of August and has gradually recovered this month. Economists are taking on board what appears to be a surge in economic activity, to wit, yesterday, after the stronger-than expected August retail sales, the Atlanta Fed’s GDP tracker rose to 5.1% for Q3. It appears to be growing faster than China. The US reports August industrial output and manufacturing production. Both are seen rising by about 0.3% after 0.2% gains in July. 

• The eurozone’s July current account surplus stood at 27.6 bln euros compared with 22.3 bln euros in July 2025. In the first seven months of the year, the eurozone’s current account surplus averaged about 26.3 bln euros compared with 24.61 bln euros in the January-July period last year. The ECB projects the current account surplus will be about 1.5% of GDP this year, down from 1.7% in 2025, which is near its five-year average. The 10-year average is around 2.1%. The eurozone current account surplus peaked near 3.5% of GDP in mid-2018, well before what some have dubbed as China Shock 2.0.  Separately, the ECB survey found inflation expectations crept up in August to 3.0% (from 2.9%) for the one-year outlook and 2.9% (from 2.7%) for the three-year outlook. Germany’s Merz, whose CDU has seen its support wane, is taking a harder line against China, but as is the case in the US, it seems, at least partly, to deflect from the homegrown problems. There are two German state elections this weekend (Berlin and Mecklenburg-Western Pomerania. In the former, the CDU is running neck-to-neck with the Left Party and in the latter the SPD is in a tight race with the AfD.

• The UK reported an unexpected 0.5% rise in August retail sales. The median forecast in Bloomberg’s survey anticipated the second consecutive monthly decline in retail sales. Recall that the UK reports retail sales in volume terms. UK retail sales have risen by an average of 0.3% a month through August this year compared with 0.2% in the first eight months of 2025. 

• As widely expected, the Bank of Japan raised its overnight rate target to 1.25% (7-2 vote), and Governor Ueda’s comments did little to dissuade the market from expecting another one before the end of the year. He warned that with inflation near target, the central bank would have to act preemptively. A few hours before the decision was announced, the August CPI was released. At 1.9%, the year-over-year headline rate was unchanged and may be the envy of most high-income countries, and its core rate, which is targeted, was slipped to 1.7% from 1.8%. It has not been above the 2% target this year. The Bank of Japan forecast this year’s growth at 0.6%, half of last year’s pace. Nor does the performance of the 10-year JGB indicate a strong sense that the BOJ is behind the curve. In the past month, as US, Germany, and UK 10-year yields rose by nearly 25 bp, Japan’s has risen by less than three basis points.