Markets Brace for Swings After Jackson Hole's High-Rate Mantra

Market participants are bracing themselves for a potentially turbulent start to the week, prompted by indications from US and European policymakers during their annual meeting at Jackson Hole that interest rates are likely to remain elevated for an extended period.

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Attention will be focused on the Japanese yen as currency markets reopen at 5 a.m. in Sydney. The yen had weakened to its lowest level against the dollar this year following Federal Reserve Chair Jerome Powell's suggestion of possible further interest rate hikes, leading to increased yields on short-term Treasuries. The movement of Australian bonds early in the trading session will offer insights into whether Asian yields will follow suit.

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Market participants are also assimilating the latest measures undertaken by China to bolster its equity market.

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In his address at the annual symposium organized by the Kansas City Fed in Jackson Hole, Wyoming, Powell emphasized the Fed's readiness to raise rates if deemed necessary. He underscored that monetary policy will continue to be shaped by economic data. Concurrently, European Central Bank President Christine Lagarde committed to setting borrowing costs at levels necessary to achieve objectives and maintaining them until inflation aligns with targets.

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Following Powell's comments, Treasury yields climbed, causing a rise in yields on two-year notes sensitive to policy changes, reaching 5.09%. The real yield on five-year notes also surged to its highest point since 2008. The yen breached its year-to-date lows, approaching 147 per dollar, reigniting discussions regarding potential intervention by Japan to stabilize its currency. Equities concluded on a positive note.

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According to Citi economists Andrew Hollenhorst and Veronica Clark, Powell's deliberate reiteration of the macroeconomic rationale for a hawkish approach to Fed policymaking corroborates the recent upward shift in Treasury yields.

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This conversation surrounding the Federal Reserve contrasts notably with the perspectives of the Bank of Japan and the People's Bank of China.

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Chinese authorities have consistently intervened to support the yuan, while Japanese officials have indicated close monitoring of the yen's movements.

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During his speech at Jackson Hole on Saturday, Bank of Japan Governor Kazuo Ueda refrained from commenting on foreign exchange rates but noted that price growth remains below the central bank's target, explaining the persistence of their current monetary policy approach.

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Notably, Asian currencies have registered a 2% decline against the dollar in this month alone, as highlighted by a Bloomberg gauge. The yuan has depreciated by 2% and recently touched its weakest point in nine months amid growing concerns about the outlook for the world's second-largest economy.

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Despite data indicating a moderation in China's industrial profits for July, the ongoing challenges in the economic recovery and the looming threat of deflation continue to cast a shadow on the sector. China has additionally introduced measures to support its equity market, including a reduction in the stamp duty on stock trades for the first time since 2008 and a commitment to decelerate the pace of initial public offerings.

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Ed Al-Hussainy, Global Rates Strategist at Columbia Threadneedle Investments in New York, noted that it is likely that interventions will intensify in the renminbi and that verbal interventions may be deployed for the yen. Although both these actions have been ongoing throughout the year, the pressures on both the yen and the renminbi are expected to persist.

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