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Morning Bid: Yen bounces from 160 per dollar in busy Fed-led week

[April 29, 2024] A look at the day ahead in U.S. and global markets from Mike Dolan

A week jam-packed with major market events kicked off with some wild action in Japan's yen during a public holiday there, with a withering drop in the currency to 34-year lows of 160 per dollar meeting predictable intervention speculation that triggered an equally eye-watering rebound.

With no official yen purchases yet confirmed, market chatter presumed there had been at least some shot across the bow as the currency's fall since Friday's anodyne Bank of Japan meeting threatened to go into tailspin. Japan's top currency diplomat Masato Kanda declined to comment when asked if there had been any action.

From Thursday's close, the dollar/yen exchange rate had jumped as much as 2.8% - with implied overnight volatility in the currency options market topping 17% for the first time this year. And even though the yen bounced hard on 160 to sit just under 156 in London, it remains weaker than it was when trading kicked off on Friday.

Japan's seeming 'benign neglect' of the currency, as Deutsche Bank described it last week, is understandable given domestic inflation is largely under wraps, the move is largely driven by interest rate fundamentals and it's flattering for Japanese exports and tourism.

But its spur to dollar-denominated energy import prices and a potential disturbance of the competitive landscape across Asia's big exporting nations means the Japanese authorities will likely not want this move to get out of hand.

And yet this week is dominated by one of the major drivers - an increasingly hawkish Federal Reserve that meets again on Tuesday and Wednesday amid ebbing hopes for more than one U.S. interest rate cut this year.

After a series of sticky inflation readings this year, only 35 basis points of Fed easing is now priced for the entire year. The March release of the Fed's favored PCE inflation gauge calmed markets a bit as it came in line with forecasts and showed no further deterioration of early-year price picture.

But it's done little to change the policy outlook - with this week's Fed signaling likely to remain non-committal while perhaps nodding to discussions on slowing its balance sheet reduction.

That may be welcomed by the increasingly agitated Treasury market - where 10-year yields returned last week to the danger zone of October/November and the so-called 'term premium' demanded by investors for long-term risks also flipped positive for the first time this year.

Yields slipped back a touch on Monday, with the Treasury this week publishing refunding plans for the coming quarter and expected on Monday to outline borrowing estimates for the two quarters ahead.

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Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration/File Photo

Most auction sizes are expected to remain unchanged, as it has already promised, but much of the attention may be on a likely bond buy back program.

Elsewhere, the week's dominant economic data sweep will be from the labor market - culminating in Friday's likely still-robust payroll report for this month.

In the corporate world, another heavy earnings week will see Wall Street trying to capitalize on what was its best week of the year last week - aided by big gains for megacaps such as Microsoft, Alphabet and Tesla.

Amazon on Tuesday and Apple on Thursday top this week's updates.

And Wall St futures were higher ahead of the bell, as world stocks continued higher following Friday's gains.

The S&P500 earnings season has picked up steam considerably from where it was indicated at the start of the month, with LSEG data showing the blended annual profit gain for the index during the first quarter now back as high as 5.6% - up from the 5.1% forecast on April 1.

In company news, Tesla has cleared some key regulatory hurdles that have long hindered it from rolling out its self-driving software in China, paving the way for a favourable result from Elon Musk's surprise visit to the U.S. automaker's second largest market.

In Europe, shares of Anglo American climbed 2.3% after Reuters reported BHP <BHP.AX is considering making an improved offer for the miner. And Atos jumped 12.6% as the French government made an offer to buy out some of its key units.

Deutsche Bank dropped nearly 4% as the German lender will make a legal provision over a litigation regarding its takeover of Postbank that will hurt its second-quarter and full-year profitability.

Key diary items that may provide direction to U.S. markets later on Monday:

* Dallas Fed April manufacturing survey

* US Treasury publishes financing estimate for next two quarters; sells 3-, 6-month bills

* * US corporate earnings: Paramount Global, Domino's Pizza, Franklin Resources, Everest, Welltower, SBA Communications, F5, ON Semiconductor, Revvity, NXP Semiconductors, Arch Capial

* European Central Bank board member Luis De Guindos speaks

(Editing by Bernadette Baum)

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