Head of FX Strategy
Summary: The US dollar backed up sharply yesterday as US treasury yields rebounded, in part on the lowest weekly US jobless claims number in over two months. USD technical status is suddenly pivotal as it pulls back to the level it broke though last week. This morning, stories suggesting that the Bank of Japan has no intention of shifting policy at next week’s meeting blasted the yen. Next week shaping up as critical for G3 FX with FOMC, ECB and BoJ meetings.
Today's Saxo Market Call podcast.
The US dollar backed up sharply yesterday and overnight, with the move aggravated this morning by a Reuters story suggesting that the Bank of Japan is likely to stand pat at next week’s BoJ meeting, sending USDJPY and JPY crosses rocketing higher. EURJPY even threatened the cycle highs. The sharp move even prompted the Japanese Ministry of Finance Kanda to come again “excessive moves” in the currency market and that he is watching the situation with a sense of urgency. Bloomberg followed up with its own article pointing to the same conclusion, with its sources saying that “there is no urgent need to address the side effects of its yield curve control program at this point, though they expect to discuss the issue.”
Prior to the BoJ story, EURUSD had challenged as low as 1.1119, still some way above the 1.1095 break level on the way up, but the surge in the USDJPY has helped push the broader USD index back above the double bottom low of 100.78 from earlier this year. As we discussed on this morning’s Saxo Market Call podcast, that doesn’t mean we have a bullish reversal on our hands just yet, especially due to the scale of the previous slide, but if we back up above 102.00 in the dollar index, a reversal threat looms. What would trigger such a scenario? Further strong US data that takes US 10-year treasury yield back well clear of 4.00% and wobbly risk sentiment, as well as a Bank of Japan that does indeed refuse to budge at its meeting next week.
Chart: USDJPY
USDJPY has reversed much of its recent slide, with a very sharp move this morning on the BoJ story discussed above. The reversal was arrested right at the 61.8% retracement level near 142.00 shown in the chart below, but has no chance of staying below there if US yields continue to reheat on resilient data, a hawkish Fed or any other reason, and if the BoJ does stand path with no willingness to even indicate it will tweak policy soon at next Friday’s BoJ meeting. We could trade 145.00 next week if US 10-year yield is 4.00% and higher and BoJ sits on its hands.
Week ahead: Incoming data and G3 central banks lined up Wed-Fri
Next week sees the G3 central banks lined up like ducks in a row. At Wednesday’s FOMC meeting, the Fed is seen hiking and will likely want to retain “optionality” on the potential to hike again, given it doesn’t need to encourage already frothy financial conditions. It can surprise hawkish by guiding more firmly for further tightening as the market is mostly convinced that this will prove the last rate hike of the cycle, with about 125 basis points of easing priced through the end of next year. Interesting data next week from the US includes the July Consumer Confidence survey on Tuesday after the June survey saw the best Present Situation reading since January of 2022 (normally correlated with labor market sentiment) and a solid jump in Expectations. We’ll also see the first estimate of Q2 GDP on Thursday and June PCE inflation data on Friday, which is more interesting than usual as a material drop in the Y/Y PCE core is expected, to 4.2% after six consecutive months of 4.6-7% core inflation readings.
For Europe, we get a look at the preliminary July PMI for France, Germany and the Eurozone on Monday. The story last month was of still ugly manufacturing PMI, while Services PMI is also struggling to show convincing growth – France’s was even below 50. Weak data could weigh on the euro, as the ECB has already been backing off its commitment to rate tightening beyond the expected 25 basis point move next week. If US yields are surging and we have weak Eurozone PMI data and a likely dovish ECB (remember my Wednesday update arguing that the ECB likely has its eyes on very stretched EURJPY and EURCNH as a factor), could we even see a full reversal in EURUSD? That requires we close next week below 1.1000.
I was leaning for a possible tweak at next Friday’s BoJ meeting, but stories circulated today give little confidence that Ueda and company are ready to move just yet, which could mean an aggravated extension of JPY weakness if US treasury yields end higher. This does little to alter the 3-month and longer term view that EURJPY and other JPY crosses are over-stretched. We get policy convergence eventually is the operating assumption.
Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar is resurgent, and the CNH is tagging along for the ride for the moment after the PBOC moved to support the renminbi this week. The greenback has much more to do to indicate a full bullish reversal. The JPY is on tilt back lower ahead of an important BoJ meeting and as US yields are suddenly perking up.
Table: FX Board Trend Scoreboard for individual pairs.
Among G10 USD pairs, NZDUSD has been the first one to suggest a full reversal in the USD sell-off is underway, and GBPUSD could be soon to follow if it fails the 1.2800-50 area, while USDCAD could be looking at a change of trend on a single large rally bar today or next week after recently rejecting new lows. USDCNH is only interesting above 7.24 or below perhaps 7.12.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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