AFS Markets Blog: Midday 31/07/2026

• Meanwhile in markets, European equities are testing all-time highs this morning as bonds are by and large on track to close the week with gains. In FX, all eyes are on the Japanese yen with another spike in the currency today following yesterday’s reported FX intervention;

• Just before 11:00 CET USDJPY dropped roughly 125 pips with no obvious trigger – knocking the pair back below the 160 handle it had crawled above this morning. At pixel time, it's retraced most of that drop though it remains below 160. The move could hint at official FX intervention, but a 125-pip drop is relatively modest – we saw a similarly sized dip on July 2nd that wasn't tied to authorities stepping into the market. The spike could potentially signal other methods – like rate checks – being used to boost the yen;

• Contrast the morning's decline with yesterday's ~500-pip drop in USDJPY. The Nikkei reported this was the result of Japanese FX intervention in tandem with rate checks by US authorities. US Treasury Secretary Scott Bessent also joined in with verbal intervention, remarking that the yen seems “very undervalued” to him;

• Now that FX intervention has taken place the clock is ticking for Tokyo. Under IMF guidelines a single intervention episode spans up to three consecutive business days – so keep a close eye on further action over the coming sessions;

• Note that IMF guidelines permit a free-floating FX regime a maximum of three intervention episodes within a six-month window before reclassifying the regime to a standard floating regime. Given that the last intervention episode occurred three months ago, Japanese authorities will only have one 'free' intervention window remaining for the coming three months (once this one ends). A reclassification of Japan's FX regime would be far more than a semantic change. It could undermine Japan’s international credibility – putting additional pressure on already battered JGBs – and risk landing Tokyo on the US Treasury's currency manipulator list (exposing it to potential trade countermeasures);

• Don't forget that more concrete support for the yen could have come from a hike at today's Bank of Japan meeting, but rates were instead held steady – as expected, with only 1bp of hikes priced into BOJ-dated TONAR swaps ahead of the meeting. For subsequent meetings, rate hike pricing has crept higher following the BOJ’s upgraded economic forecast – up 3 to 4bps today – but punters don’t believe the BOJ is in a rush. September pricing now sits at 10bps of tightening – which does make that meeting live – though a full hike isn't priced in until the last meeting of the year. Pricing for the October meeting stands at 22bps of hikes;

• Shifting to equities, at 6,421 points the Stoxx 50 has come within just 10 points of the intraday record it set in early July. Up around 1 percent this morning, the index is now sporting a year-to-date gain of roughly 10 percent. That places it neatly between the S&P 500 – up around 9 percent – and the Nasdaq – up 11 percent. Equities across our screens are benefiting from the (dead-cat?) bounce in technology stocks after the latest round of hyperscaler earnings beat expectations by enough to satisfy punters. Our own AI index is up 5 percent today – putting it back roughly where it started the week;

• Moving to broader market commentary, it is a mixed picture in bonds today. The 2-year Bund yield is up 3 bps this session while the 30-year yield is holding steady at 3.66 percent. Across the Atlantic, the 2-year UST yield is up by a basis point this morning while the 30-year yield is down 2bps. Nevertheless, the 30-year is set to be the only benchmark to close the week higher in yield – up 4 bps after a weak performance by Fed Chair Kevin Warsh at the FOMC on Wednesday. The broad dollar is down roughly 1 percent this week, with the move largely driven by yesterday's yen intervention;

• Looking ahead, the afternoon has little on the docket. Next week's calendar is packed with data releases as August gets underway in earnest. The week kicks off with a flurry of PMI releases across the Eurozone and the US, but as always, Friday's US labor market report is set to take center stage.

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