Investors stick with yen as recession fears grow; sterling slides

The Japanese yen clung to its recent gains on Wednesday as worries about a global economic downturn grew, while sterling slumped on British Prime Minister Boris Johnson’s move to limit parliament’s opportunity to derail his Brexit plans.

Two-year U.S. government bond yields rose further above 10-year yields, a deepening of the so-called inversion of the yield curve that many see as a harbinger of a recession. Investors worry the trade conflict between the United States and China could tip the world into an economic slowdown.

The yen stood at 105.78 yen per dollar, unchanged on the day but close to the 7-month high of 104.46 yen hit on Monday.

“Much if not all of the decline in dollar/yen is simply down to markets becoming more risk averse,” said Adam Cole, currency strategist at RBC Capital Markets.

Cole said, however, that if the outlook for the global trade conflict improves and risk appetite recovers, he expected the dollar to “grind higher” against the yen as Japanese investors continue to buy higher-yielding dollar assets without hedging the currency risk, which would support the greenback.

The dollar index, which measures the U.S. currency against a basket of currencies, rose marginally to 98.091.

Sterling skidded more than 1% against the euro and dollar on media reports of Boris Johnson’s plans.

A government source said the prime minister, who has vowed to take Britain out of the EU without a divorce deal if necessary, would set an Oct. 14 date for the Queen’s Speech – the formal state opening of a new session of parliament.

That would effectively shut parliament from mid-September for around a month and reduce the parliamentary time in which lawmakers could try to block a no-deal Brexit.

Sterling was last down 0.7% at $1.2198 and 0.7% lower versus the euro at 90.93 pence, just off the day’s lows.

Elsewhere, weaker risk appetite weighed on the Australian and New Zealand dollars, which tend to perform well when investors buy into riskier assets.

The Aussie has been on the back foot since Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said on Tuesday that a weakening the currency was supporting the economy and that further falls would be beneficial.

The Aussie had fallen to a more than decade-low of $0.6677 early in August. On Wednesday it stood at $0.6724, down 0.1% on the day while the kiwi was 0.3% lower at $0.6341.

The Chinese yuan edged lower to 7.1703 in offshore markets, not far from the record low of 7.187 it touched on Monday.

Euro/dollar was little changed, trading at $1.1091 with little in the way of new economic data scheduled for Wednesday or developments to spark bigger moves.

Analysts at ING said positive news in Italy, where the 5-Star Movement and the opposition Democratic Party appear on the verge of agreeing a governing coalition, would not help the euro significantly.

“Instead the escalation in trade wars merely looks to extend the slow-down in manufacturing, depressing European growth still further. Like all activity currencies, the EUR looks soft and could break down to new lows at any time. EUR/USD support at $1.1025/50 looks vulnerable,” they said.

Yen rises as investors flock to safe-haven assets

The Japanese yen rose and 10-year Treasury yields fell on Tuesday as investors fled to safer assets amid worries the U.S.-China trade conflict would get worse, days after both sides announced new tariffs.

On Friday, China said it would increase tariffs on $75 billion worth of American goods. The United States retaliated by saying it would raise existing tariffs on $250 billion worth of Chinese goods to 30% from 25% on Oct. 1.

U.S. President Donald Trump also said he would tax another $300 billion worth of Chinese imports 15%, rather than the 10% he had planned. Those levies go into effect on Sept. 1.

On Monday, speaking on the sidelines of the G-7 summit of world leaders in France, Trump said Chinese officials had contacted U.S. trade counterparts overnight and offered to return to the negotiating table.

Trump’s comments sparked a wave of so-called risk-on trades, which initially boosted the dollar, weakened safe-haven currencies, and lifted stock markets.

However, doubts crept in after a Chinese Foreign Ministry spokesman said he was unaware that a phone call had taken place. The Commerce Ministry, which typically releases statements on trade calls, did not respond to a request for comment.

“The yen has been one of the best-performing global currencies this year and continues to benefit from building downside risks to global growth from escalating trade tensions,” said Lee Hardman, currency analyst at MUFG.

The Japanese currency was last up by 0.5% at 105.63 against the dollar. That wasn’t as strong as Monday’s gain, when it reached a three-year high, excluding the January flash crash. The yen has gained 3.6% against the dollars as the trade war drove traders to safe-haven assets.

The yen is “likely to strengthen further if tensions continue to build,” Hardman said.

Ten-year U.S. Treasury yields fell to 1.5097%, keeping the yield curve inverted as two-year yields traded at 1.5264%, a sign of an impending recession.

The offshore Chinese yuan, sensitive to U.S.-China trade disputes, was lower Tuesday after plunging to a record low of 7.1870 against the dollar the day before. It last traded down 0.1% at 7.1770.

China’s central bank lowered its official yuan midpoint to an 11-1/2-year low on Tuesday, but stronger than traders had expected.

The Turkish lira was down by 0.4% at 5.8452 against the dollar, having plunged Monday by more than 10% in a second flash crash this year.

Elsewhere, major currencies were relatively stable.

The euro was up by 0.1% at $1.1113 and the index that tracks the dollaragainst six other currencies was l down 0.2% at 97.898.

The pound was up 0.2% at $1.2242 and 0.1% against the euro at 90.765 pence.

Yuan slumps to 11-year low as investors flee trade war risk

China’s yuan hit an 11-year low in onshore trade and tumbled to a record low in offshore trade after a sharp re-escalation in the U.S.-China trade war whacked investor confidence and darkened the global economic outlook.

The yen, often bought as a safe haven, briefly rose to the highest against the dollar since a January flash crash. But those gains were erased as Japanese importers sold yen, which remained firmer against other currencies, a sign of waning risk appetite.

Gold reached its highest level since April 2013, at $1,554.56 per ounce.

The Turkish lira and emerging Asian currencies also fell as investors fled to safer assets.

“China’s economy is slowing, so the yuan will only fall further unless authorities take steps to stop it,” said Takuya Kanda, general manager of the research department at Research Institute in Tokyo.

“Some dollar buying from Japanese importers pulled dollar/yen off its lows, but excluding such real demand there’s no reason to buy the dollar. The yen will continue to rise.”

In China’s onshore market, the yuan fell to 7.1500 per dollar, the lowest since February 2008. In the offshore market, the yuan slid to 7.1850 yuan, the weakest since international trading in the currency began in 2010.

The Turkish lira weakened around 1% to more than 5.8 against the dollar on Monday after briefly plunging to 6.47 in what market watchers described as a  “flash crash” as Japanese investors cut risk assets.

U.S. stocks tumbled on Friday when President Donald Trump announced an additional 5% duty on $550 billion in targeted Chinese goods, hours after Beijing unveiled retaliatory tariffs on $75 billion worth of U.S. products.

At the G7 meeting in France over the weekend, Trump caused some confusion by indicating he may have had second thoughts on the tariffs.

The White House on Sunday clarified these comments, saying Trump wished he had raised tariffs on Chinese goods even higher last week, even as he signalled he did not plan to follow through with his demand that U.S. close Chinese operations.

In Asian trading, the benchmark 10-year U.S. Treasury yield fell to 1.4560%, its lowest in more than three years. The yield curve inverted as yields on 2-year debt fell to 1.4568%.

Earlier this month, the yield curve inverted for the first time in more than a decade when long-term yields traded below short-term yields, which is commonly considered a signal of an economic recession. Investors will watch to see if this section of the curve inverts again.

The yen surged early in Asian trading to 104.46 per dollar, the highest since January, before moving back to trade unchanged on the day at 105.35.

“Speculators came into the market very early to put heavy pressure on dollar/yen,” said Yukio Ishizuki, foreign exchange strategist at Daiwa Securities in Tokyo.

“The fact that the offshore yuan is down this much shows speculators have gotten a little wild. The trade war is driving all these moves, and I don’t see this ending anytime soon.”

The yen will next target 104.10 per dollar, which is the high it reached during a flash crash on Jan. 3 that roiled financial markets, Daiwa Securities’ Ishizuki said.

The Australian dollar, a liquid proxy for risk, was down 0.3% to $0.6735 at 0449 GMT. An earlier level of $0.6690 was within a whisker of a recent decade-low of $0.66775.

The New Zealand dollar slipped to $0.6342, a level not seen since September 2015.

Against the yen, the Aussie briefly fell to 69.97 yen, the lowest since April 2009, before paring losses.

The kiwi skidded to 66.32 yen, the lowest since November 2012.

Euro weakens, dollar rises as market awaits Fed’s Powell

The euro edged lower and the dollar strengthened broadly on Friday, awaiting a keynote speech by the head of the Federal Reserve after some of his fellow policymakers signalled reluctance to cut U.S. interest rates further.

Fed Chairman Jerome Powell is expected to address the Jackson Hole symposium of central bankers at 1400 GMT, and traders will be keen to see how closely he allies himself with the hawkish camp.

Currency markets have in recent months been driven by global central banks’ shift to more accommodative policy settings as economic demand slows and trade disputes intensify.

Expectations that the Fed will cut rates at its next meeting in September are still very high, according to interest rate futures, but the currency market is likely to react if the tone of Powell’s comments does not match these dovish expectations, analysts said.

“I would expect him to stress that the U.S. economy is strong enough that…just a rate cut or two, taken out as ‘insurance’, will be enough to keep the recovery on track,” said Marshall Gittler, chief strategist at ACLS Global.

“That’s probably more hawkish than what the market is expecting and could be positive for the dollar.”

The euro was down 0.1% at $1.1067 after falling to a three-week low of $1.1061 earlier. The index which tracks the dollar against six major currencies was up by 0.2% at 98.35.

The euro attempted to stage a relief rally the day before following the stronger-than-expected euro zone purchasing managers’ surveys for August, but the gains proved short-lived.

The PMIs will keep “pressure on the European Central Bank to deliver further stimulus to support growth” in the euro area because “surveys remain consistent with weak growth continuing in the third quarter,” said Lee Hardman, currency analyst at MUFG.

Views that rates may not go as low as previously expected also bolstered the New Zealand dollar after its central bank chief said he was “pleased” with where interest rates were.

Reserve Bank of New Zealand Governor Adrian Orr told Bloomberg TV he could afford to pause on monetary policy after 50-basis-point cut this month.

The New Zealand dollar jumped from a three and-a-half-year low of $0.6362 reached Thursday, trading up 0.4% at $0.6387.

China’s offshore yuan stabilized at 7.0920 after dropping to an 11-day low of 7.1072 overnight as the People’s Bank of China lowered its official yuanmidpoint to an 11-year low. Still, the move was limited given that the set rate was nowhere near the lows traders were expecting.

The pound gave back some of the gains it made on Thursday on the back of German Chancellor Angela Merkel giving Britain 30 days to come up with a Brexit plan, dropping 0.4% to $1.2208. Against the euro, it fell 0.3% at 90.66 pence.

Euro struggles vs dollar as attention turns to Fed

The euro struggled to make headway against a resilient dollar on Wednesday and was stuck near $1.11, with forex markets mostly calm ahead of a crucial meeting of central bankers later this week.

With markets rushing to price significant easing from central banks in the United States and Europe, the outlook for euro/dollar will depend largely on whether or not policymakers live up to those expectations.

Officials from major central banks will gather at Jackson Hole, Wyoming, on Friday with markets focused on a scheduled speech by Federal Reserve Chair Jerome Powell.

His comments are of particular interest after last week’s inversion of the U.S. yield curve – widely regarded as a recession signal – boosted expectations the Fed would lower interest rates at its September policy meeting. Faced with rising risks to the U.S. economy, the central bank in July cut rates for the first time since the financial crisis.

“In the big scheme of things, markets are relatively range-bound, with the focus on Jackson Hole later this week,” said Manuel Oliveri, a strategist at Credit Agricole.

The euro was last down 0.1% at $1.1092. The dollar, measured against a basket of currencies, rose 0.1% to 98.265.

Oliveri expects the euro to strengthen towards $1.12 by September, even though the European Central Bank will struggle to exceed investor expectations for cutting rates.

Talk of more fiscal spending in Germany, and the hit to the U.S. yield advantage from falling interest rates, should support the euro, he added.

“Fiscal stimulus is a positive for the currency,” he said.

The dollar has also been supported by talk of more spending – President Donald Trump said on Tuesday his administration was considering potential tax cuts on wages as well as profits from asset sales.

The single currency was little moved on Tuesday after Italy’s Prime Minister Giuseppe Conte announced his resignation, with some investors believing the move made a snap general election less likely.

Elsewhere, sterling was the big focus as Prime Minister Boris Johnson heads to Berlin to meet Chancellor Angela Merkel for talks over Brexit.

The pound jumped on Tuesday after Merkel raised the possibility of practical solutions to the so-called backstop – an insurance policy for the Irish border after Brexit -that London opposes.

With the British currency having slumped in recent weeks on concerns about a no-deal Brexit on Oct. 31, investors have built up a huge short position – analysts say that makes the currency vulnerable should any positive noises emerge from Johnson’s meeting with Merkel.

Sterling was last down 0.3% at $1.2134 and 0.2% lower versus the euro at 91.405 pence.

The dollar rose against the yen, rising 0.3% to 106.55.

MUFG analysts said the dollar was rising against the yen after Trump said he wanted to introduce new tax cuts and on reports that negotiations to agree a U.S.-Japan trade deal were making progress.

“While trade talks are ongoing, it will be more difficult for Japan to express concern over a stronger yen given President Trump’s concerns over currency manipulation,” the analysts wrote.

Euro weakens vs dollar as Treasury yields pick up on stimulus talks

The euro hovered around a two-week low versus the dollar as the U.S. currency held strong on Tuesday, boosted by slightly higher Treasury yields, while political uncertainties in Italy also kept the common currency subdued.

Yields on U.S. benchmark 10-year government bonds pulled away from three-year lows, helped in part by the prospect of Germany ditching its balanced budget rule to boost spending and on more economic support measures by China.

Yields fell last week to cause an inversion of the short-dated and long-dated yield curve, sending alarms through financial markets given that several recessions in the past have been preceded by yield curve inversions. The curve of the two-year and 10-year Treasury yields was slightly steeper on Tuesday.

“The dollar is higher across the board, tracking the rebound in yields. The prospect of Germany embarking on stimulus was the turning point and the dollar has regained momentum since,” said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

The dollar index was flat at 98.385 after rising to a two-and-a-half week high of 98.40 earlier.

The euro was also flat at $1.1078, but not far from the $1.1066 low it reached on Friday on lingering concerns over political developments in Italy.

Prime Minister Giuseppe Conte is set to address parliament on Tuesday afternoon (1300 GMT) to defend his record. He might hand in his resignation immediately afterwards or could instead wait for a formal vote to make it clear he is being unseated by the far-right League.

A vote has not yet been scheduled and there is widespread uncertainty over how the political turmoil will end Deputy Prime Minister Matteo Salvini pulled the plug on the ruling coalition Movement earlier this month, hoping to trigger early elections that would likely see him crowned as prime minister.

“The possible success of the no-confidence vote in Italy today could push euro/dollar towards and even below the psychological 1.1000 level today,” said Chris Turner, head of forex strategy at ING.

“Though falls are unlikely to meaningful or persistent,” he said, “because the negative spillover into the euro from periods of political uncertainty in Europe has been somewhat limited over the past year.”

Elsewhere, a stronger dollar pushed the offshore Chinese yuan lower to have it match a six-day low of 7.0770 against the greenback earlier, though China’s offshore yuan was last trading neutral at 7.0708.

The pound was down by 0.3% both against the dollar and the euro, last at $1.2092 and at 91.55 pence against the euro.

British Prime Minister Boris Johnson made new waves by writing to European Council President Donald Tusk on Monday to propose replacing the Irish backstop with a commitment to put in place alternative arrangements by the end of a post-Brexit transition period.

Johnson will meet both French President Emmanuel Macron and German Chancellor Angela Merkel during the week and is also planning to meet Ireland’s Prime Minister Leo Varadkar in September.

Market focus should shift to the annual symposium of global central bankers starting on Friday at Jackson Hole, Wyoming.

Yen climbs as US recession gauge flashes red

The Japanese yen jumped to the day’s high on Wednesday as the United States bond yield curve inverted for the first time since 2007 as investors, gripped by worries of a looming global recession, fled to the safety of perceived safe-haven assets.

An inversion of the U.S. Treasury yield curve — when short-dated bond yields fall more than their longer-dated counterparts– is considered as a classic recession warning and the drop in bond yields sent a chill through global markets after concerns of a U.S.-China trade dispute receded somewhat.

The yen, which was already trading stronger on the day, received a further boost and headed towards a near 1-1/2 year high versus the U.S. dollar.

“What this (yield curve inversion) means is that markets are signalling that central banks are running out of options. Away from the headlines on the trade war, it points to a bigger broader picture of major industrial economies such as China and Germany haemorrhaging growth,” said Stephen Gallo, European head of forex strategy at BMO.

Data on Wednesday showed that the Chinese economy continued to slow. Industrial output rose in July at the slowest pace in more than 17 years. Elsewhere, slumping exports sent Germany’s economy into reverse in the second quarter.

The Japanese currency strengthened to 106.12 versus the dollar, its highest on Wednesday, up 0.6% on the day.

Overnight, it had fallen to a one-week low after U.S. President Donald Trump backed off his Sept. 1 deadline for imposing 10% tariffs on remaining Chinese imports, delaying duties on cellphones, laptops and other consumer goods. The announcement came after renewed trade discussions between U.S. and Chinese officials.

China’s offshore yuan gave up some of its earlier gains on Wednesday as weaker-than-expected economic data tempered the optimism generated by the U.S. decision to delay tariffs.

The fall in the yuan and the rise in yen mirrored analysts’ views that the delay in tariffs, although encouraging, wasn’t even close to resolving the U.S.-China trade war.

“No one really believes this is a firm step towards a deal” between the United States and China, said Neil Mellor, senior forex strategist at BNY Mellon.

“The markets already moved on…and longer term the yuan will continue to weaken,” Mellor said.

The offshore yuan had jumped to a one-week high against the dollar on Tuesday after the tariff delay, but it fell back 0.4% against the dollar to 7.0396, still more than seven to the dollar, the level it reached last week when the 10% tariffs were announced.

China fixed the onshore yuan at 7.03, “the only sign so far of China making any concessions” to the United States, said Esther Reichelt, an analyst at Commerzbank.

Elsewhere, major currencies were little changed. The dollar index, which is down around 1% since the start of August, was flat around 97.7 despite the yield curve inverting.

Same goes for the euro, which was flat at $1.1180 after first estimate of second-quarter eurozone gross domestic product showed growth in the euro area remained stable as quarter-on-quarter GDP rose 0.2% as expected.

Sterling was slightly higher against the dollar and the euro, last by 0.2% at $1.2087 and 92.49 pence versus the common currency , even though inflation in Britain was 2.1% in July, above Bank of England’s target.

However, current levels in sterling suggest investors aren’t willing to take the British currency away from the deep lows it reached last week.

Yen strengthens against the dollar amid ongoing US-China trade uncertainties

The dollar remained on the defensive against the safe-haven yen on Monday as the Sino-U.S. trade dispute looked set to drag on with no settlement in sight, while holidays in Japan and Singapore made for very thin trading.

Confusion still lingered after U.S. President Donald Trump on Friday said he was not ready to make a deal with China and even called a September round of trade talks into question.

Goldman Sachs over the weekend cut its forecast for U.S. economic growth, warning that a trade deal was unlikely before the 2020 presidential election and that the risks of a recession were increasing.

“Overall, we have increased our estimate of the growth impact of the trade war,” the bank said in a note.

All eyes will be on Chinese figures on retail sales and industrial output due Wednesday to gauge the impact of the long-running tussle on domestic activity.

Beijing has allowed its yuan to ease in recent weeks as an offset to the tariffs, pressuring emerging market currencies across Asia and boosting the yen.

The dollar edged up to 7.1034 yuan in offshore trade early on Monday as investors waited to see where the Chinese central bank would chose to fix it.

The dollar went the other way against the yen, easing to 105.40 after hitting a seven-month low around 105.25 on Friday. The dollar was hardly alone, with the euro down at 118.16 yen and near its lowest since April 2017.

Likewise, sterling had sunk to depths not visited since 2016 at 126.69 yen having shed over eight yen in little more than two weeks.

The pound struck a two-year trough on the dollar on Friday after data showed the UK economy unexpectedly contracted in the second quarter, only adding to the bearishness over Brexit and the chance of a no-deal exit.

Sterling was last at $1.2020 and eyeing support at $1.1979, which marks a low from January 2017.

The Telegraph reported Labour MPs had been told to cancel all travel in early September in anticipation of Jeremy Corbyn tabling a motion of no confidence in the government.

The euro was steady on the dollar at $1.1200, bound between resistance at $1.1249 and support at $1.1175.

Politics remained a drag with the prospect of snap elections in Italy up in the air as opposition built to League chief Matteo Salvini’s plans for a vote.

Another hurdle will be Germany’s gross domestic product figures on Wednesday where a contraction is a real risk given a steep drop in factory output in June.

Rate cuts, China data caps dollar gains

The dollar steadied on Thursday as risk sentiment rose after resilient Chinese trade data and as Beijing’s efforts to slow a slide in the value of the renminbi encouraged investors to buy riskier currencies.

Data showed Chinese exports rose 3.3% in July from a year earlier, while analysts had looked for a fall of 2%. Policymakers meanwhile fixed the daily value of the yuan at a firmer level than many had expected, even though it was beyond the 7 per dollar level for the first time since the global financial crisis.

Against a basket of currencies the dollar was broadly steady at 97.58, but it weakened 0.1% versus the Australian dollar and the British pound.

“The recent comments from Chinese officials suggest they want to stabilise their currency, otherwise a sharp currency drop may fuel capital outflows,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.

“The other factor helping risk sentiment is a growing swathe of central bank cuts.”

Those rate cuts have helped soothe sentiment this week among investors anxious about the downside risks to the global economy from a trade conflict between Washington and Beijing.

This week, New Zealand joined India and Thailand in cutting interest rates, with market expectations growing that other major central banks will join in with monetary policy easing.

Indeed, market expectations for more than a quarter point rate cut from the U.S. Federal Reserve in September is still firmly baked into bond markets, despite an overnight bounce in global markets.

Those expectations forced the dollar to weaken also against the euro and the yen.

The yen was a tad firmer at 106.185 per dollar. It touched 105.500 yen overnight, its strongest level since Jan. 3, before pulling back slightly.

“The yen’s appreciation versus the dollar may have slowed for now, but it stands to keep gaining in the longer term,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo. “Its other peers, notably the antipodean currencies, have weakened severely and this provides overall support to the yen.”

The kiwi nudged up 0.1% to $0.6452, following a slide to a 3-1/2 year low of $0.6378 on Wednesday after the rate cut.

August collapse in the 10-year Treasury yield picks up steam, now at just 1.65%

The August slide in the 10-year Treasury note yield accelerated on Wednesday to new 2016 lows after China announced a weaker benchmark for its currency and a host of overseas central banks introduced aggressive interest rate cuts.

The yield on the German 10-year bund hit a new all-time low of -0.598% while the 30-year bund also hit a record at -0.137%.

At around 7:47 a.m. ET, the yield on the benchmark 10-year Treasury note was lower at around 1.655%, off a low of 1.645% hit earlier in the session, the note’s lowest level since Oct. 4, 2016. The yield on the 30-year Treasury bond bottomed at 2.164%, its lowest since July 14, 2016.

Investors have been rushing into safer assets like U.S. government bonds since last week amid market concerns over U.S.-China relations. The U.S. 10-year Treasury yield, which influences mortgages and other loans, fell to 1.66% during Asian trading — its lowest level since October 2016.

The increased appetite for bonds is also seen in the U.K. and Germany. The 10-year German Bund yield dropped further on Wednesday to -0.573%, while the U.K. 10-year gilts hit a record low of 0.489%.

China’s central bank set the official midpoint reference for the yuan at 6.9996 on Wednesday, slightly weaker than what markets anticipated. Beijing allows the yuan to trade within a narrow band of 2% from each day’s midpoint. Its level against the dollar is important given that the lower the currency, the cheaper Chinese products will be when exported.

This comes after the United States declared that China was a currency manipulator – a step that hadn’t been taken since the Clinton administration and escalated tensions among the two countries.

On the data front, there will be consumer credit figures out at 3 p.m. ET.

Traders will also monitor a speech by Chicago Fed President Charles Evans at 9:30 a.m. ET.

Meanwhile, the U.S. Treasury is set to auction $27 billion in 10-year notes.

Central banks in India, New Zealand and Thailand surprised markets on Wednesday with aggressive cuts in rates.