[MARKET ANALYSIS] DXY flat into US PPI, USD/JPY subject to volatile activity as jawboning picks up

• G10s are mixed against the flat USD. EUR and GBP both hold steady, whilst the Antipodeans are the slight underperformers, given the risk tone. However, the risk tone is not quite displayed fully, with the typical havens (CHF and JPY) also posting mild losses this morning.
• DXY trades within a 103.05-103.23 range and is set to end the week firmer by c. 1.5%. The index caught a bid earlier in the week following hawkish commentary from the Fed’s Waller, who indicated his openness to a 50bps hike; the subsequent hotter-than-expected CPI report also helped DXY move higher. The days following were a bit more quiet from a US-standpoint, but the geopolitical environment remained volatile. The US-Russia-Ukraine talks yielded no significant progress (but were touted to be productive), whilst Iranian officials warned that distant US bases could become a target should they attack Tehran again.
• Next up for the USD will be the US PPI report (13:30 GMT), which will help forecasters in predicting the PCE report due later this month. Also on the agenda are a few Fed speakers, dotted throughout the day. Since Waller, none of his colleagues have expressed their openness to a larger 50bps hike in December; markets will await whether anyone else will join him.
• The week has also seen USD/JPY breach beyond the 160.00 mark, with the pair up 1.2% WTD. Pressure in the JPY was largely attributed to this week’s USD strength, and the subsequent widening of yield differentials between the Fed and BoJ. The latest leg higher in the pair has brought some Japanese officials out of the woodwork, to offer some renewed verbal intervention – albeit to no avail. Yesterday, top currency diplomat Mimura mentioned that the JPY’s recent fall is too rapid, reminding the market of the aggressive action taken in the summer. Today, Japanese PM Takaichi said that they are in close contact with the US authorities regarding FX, whilst Finance Minister Katayama explicitly mentioned that they are seeing one-sided and rapid FX moves and will communicate with the US Treasury accordingly.
• Jawboning which ultimately failed to push the USD/JPY back lower. An interesting move was seen today at around 06:30 London time, which saw the pair get whacked from above the 160.00 level to the mid 159.00 mark. Traders may speculate that this was the MoF/BoJ defending the level to some small degree.

The mechanics here are the standard ones for a breakout in USD/JPY: the pair is trading the rate differential, and a widening Fed-BoJ gap does the work regardless of what Tokyo says. Verbal intervention of this kind follows a well-worn escalation ladder, from 'too rapid' commentary by the top currency diplomat, to finance minister remarks about one-sided moves, to claims of contact with the US Treasury, and historically the jawboning phase has only capped the pair when actual MoF intervention followed or when the US side of the differential narrowed on its own. The reference to 'aggressive action taken in the summer' is the template officials are invoking, and past episodes of that kind have produced sharp but often temporary reversals, with the pair re-testing the level once the flow subsides unless the policy backdrop had shifted. A sudden whack lower in quiet London morning trade, absent a headline, fits the profile of either rate-check probing or a small actual operation; the tell that has historically distinguished them is whether follow-through selling appears in subsequent sessions. On the US side, the transmission runs from hawkish Fed commentary and a hot CPI into front-end repricing, and the open question the headline flags is whether any other official echoes Waller's openness to a larger December hike, since one voice has rarely repriced the path but a second tends to. PPI is the near-term catalyst mainly as an input to PCE forecasting rather than a market-mover in its own right, and Fed speakers through the day are the other watch item. The mixed G10 tape, with havens soft alongside a firm dollar, is consistent with a yield-driven rather than risk-driven move.