The Japanese Yen cedes ground
Markets
Markets took comfort from RN Le Pen’s intention to clean up the French fiscal mess should she succeed President Macron following next spring’s elections. She vows to restore a primary balance within 18 months, bring the deficit (currently 5.4% of GDP) below 3% by 2030 and below 2.5% by 2032 and reduce the debt ratio from 121% of GDP expected next year to about 112% of GDP by 2032. A constitutional “golden rule” should support a progressive reduction in France’s debt burden. In what is still a high-level proposal, Le Pen targets €140bn of net savings by 2032 while still delivering at least €30bn of tax cuts. The French 10-yr OAT-swapspread narrowed from starting levels around 130 bps to a 117 bps close. The jury is out whether the short-term move sticks, with much possibly depending on a swift approval of the 2027 draft budget. The move created some breathing space for EUR/USD, but the “rebound” didn’t really went that far. EUR/USD moved from an intraday low just above 1.12 towards 1.1250+ levels. A new increase in energy prices following reports of increased Iranian vessel attacks in Hormuz blocks the move with the pair changing hands around 1.1230 this morning. Brent crude is back above $101/b after testing the $97/b technical support area yesterday morning. EUR/GBP set its sight again at the YtD low at 0.8455.
The Japanese yen cedes ground this morning after Japanese media reported on a potential second, smaller, supplementary budget in fiscal 2026. The focus would be on essential projects like disaster response and it could be compiled as soon as November. PM Takaichi in unrelated comments before parliament said that the government will review its spending and revenue plans (for FY 2027) if yields move in an unexpected way. A consumption tax cut on food products and cash handouts are the preferred policy tools with plans likely be finalized in December. USD/JPY rises from 158 to 15.8 with technical resistance lining up at 159.04 and 160.39. Today’s eco calendar includes a $39bn 10-yr Note auction. With the US 10-yr yield holding extremely close to last week’s multi-annual high (5.31% vs 5.34%), the auction will be a strong test for investor appetite. Up until now, the marginal new buyer of US T’s hasn’t showed up yet, keeping the underlying yield trend higher very much alive. FOMC Minutes are worth watching as well with investors looking for clues on the probability of back-to-back Fed action in October (currently 20% discounted).
News and views
The Indian central bank (RBI) for the first time in four years raised its policy rate by 25 bps to 5.5%. More tightening is likely as the RBI shifted its stance to “calibrated tightening” from neutral before. The unanimous rates decision follows a worsening inflation outlook. August CPI stood at 4.82%, above the 4% target (+/- 2 ppts) while the RBI raised the forecast for FY2027 to 5.2% from 5%. Core inflation is seen at 4.4% from 4.3% earlier. The forecast raise reflects the weak currency, a renewed energy price surge since the August review and a 13% monsoon rainfall deficit that will likely result in weaker harvests. At the same time, the economy continues to power through on resilient domestic demand and strong capex. The central bank upped its FY forecast to 7.1% from 6.7% before. The economy in the April-June quarter grew 7.8%, above the RBI’s 7% expectation. The Indian rupee fails to benefit from the widely expected hike. USD/INR in a fraught session rises to 96.53, just shy of the record lows seen earlier this year.
Brussels is considering a broad levy on large corporations operating in the EU in a new effort to raise additional revenues for the bloc’s budget. These new centralized levies are ought to compensate for faltering global efforts for a minimum tax for multinationals and to spare EU member states, which already face spending constraints. The European Commission is considering changes to an existing proposal, called Corporate Resource for Europe (Core), that would require companies with a revenue of more than €100mln a year to pay an annual contribution, the Financial Times reported citing officials. But many member states are opposed, saying that would hit many medium- sized European companies while at the same time it would barely be felt by the huge US (digital services) corporates. Adjusting the threshold and contributions could address the criticism while at the same time escape US retaliation because it does not single out US tech companies.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
