Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Update: Waiting for broader JPY resilience, not Godot.
John J. Hardy
Chief Macro Strategist
Summary: Recent developments, especially the consolidation in global sovereign bond markets, have opened a solid window of opportunity for the Japanese yen to recoup some of the steep losses of the last couple of months. The CPI data today from the US may not set the tone for much longer as we all know that a bit of mean reversion lies ahead for inflation rates, but with extreme uncertainty on where inflation will be six to eighteen months from now, even if central banks wax confident.
FX Trading focus: Solid conditions for JPY to take back some lost ground. Fed’s Williams provides optimistic inflation forecast…why?
The JPY has posted a solid comeback, but the backdrop of lower energy prices and especially lower bond yields (more below) since the start of the week suggests that the JPY should be firmer still. Are traders waiting to get today’s US CPI data release out of the way or is something else preventing the JPY from a bit more mean reversion at minimum? Note the comments on GBPJPY technical in the case of GBPJPY below.
The fairly powerful consolidation in global bond markets this week has seen the US 10-year Treasury benchmark yield pushed back down south of 3.00% after trading near the 2018 high of 3.25% at the start of this week. Hawkish rhetoric from Fed members yesterday, including FOMC voter Mester, who advocates keeping 0.75% hikes on the table if necessary, failed to see yields at the front end of the curve higher. We seem to have the market looking forward to today’s US Apr. CPI data suggesting a roll over in inflation as year-ago levels of 0.7%+ for a few months are possibly set to allow the CPI data series to drop up to a couple of hundred basis points over the next few months and feed into lower core inflation as well. But then we have the NY Fed’s Williams out yesterday expressing the belief that core inflation will ease to 4% this year and 2.5% in 2023! It feels like the Fed is far from having learned its lesson on the minefield of providing economic forecasts. The pattern suggests, however, that some at the Fed may be attempting to tap the brakes on market expectations after Powell ruled out 75 basis points at last week’s FOMC meeting and now this approach from Williams.
Chart: GBPJPY
GBPJPY is the major JPY pair closes to testing important support on this run higher in the JPY on lower bond yields and weak risk sentiment more broadly, while in relative terms, the pound is suffering on the Bank of England’s dour outlook on the economy, which has the market expecting that the Bank of England’s tightening regime will slow notably versus its peers. The big 160.00 level is in play here, which looks a bit of a head-and-shoulders formation locally. This lies ahead of the well-defined former range highs near 158.00, a move below which would begin to suggest the end of the bull run from the pandemic outbreak lows of early 2020.
Among G-10 currencies, the Norwegian krone has suffered the most over the last couple of weeks, according to our FX Board measure of trend strength (see below). Yesterday’s Norwegian April CPI release was far higher than expected at 5.4%, which is a 13-year high and makes the Norges Bank recent decision to continue with mere 25 basis point rate hikes every quarter an excessively slow pace. EURNOK traded briefly to a new high for the year above 10.23, having entirely reversed its run lower below 9.50 (!) as the commodity theme in FX has stumbled badly since an early-mid April peak.
Inflation is high in the CEE countries, with Romania today reporting a CPI rise in March of 13.8% year-on-year and a month-on-month rise of a 3.7%, both far higher than expected. Given that the most recent wage data from February in Romania shows wages rising at a greater than 10% pace, this is not as alarming, if still the highest inflation print I have seen anywhere in CEE or developed Europe. Which takes us to Hungary: I have spotlighted Hungary’s stunning +32% wage rise in March just ahead of the April election and inflation there is supposedly at 9.5%, actually south of what the Netherlands reported in both March and April (9.7% and 9.6%), much less what Romania is suffering in the way of inflation. To be fair, Hungary’s wage rises were at more like 10% for much of the last two years and some of the March figures were from one-off bonuses to public sector employees clearly meant to tilt the election in Orban’s favour, but the situation bears watching there even as forint (HUF) has taken all of this in reasonable stride, helped by the central bank’s 5.4% policy rate and 6.45% deposit rate.
Note that Australian Westpac consumer confidence cratered in April to 90.4 from 95.8 in April, taking it near or below 90 for the first time since the pandemic outbreak months and before that in the global financial crisis years of 2008-09 with a single blip in 2011 below 90.
Table: FX Board of G10 and CNH trend evolution and strength.
The Euro getting some respect in the crosses even if attempts to bounce versus the strong US dollar have not impressed. The JPY momentum has turned net positive, but still not much of a signal there. Note NOK’s weakest-of-G10 status of the last couple of weeks.
Table: FX Board Trend Scoreboard for individual pairs.
EURCHF has shied away from 1.0500 after a test yesterday – lower bond yields likely coming to the CHF’s aid there. The key trends to watch are the JPY crosses if bond yields press lower still, and then the status of AUDUSD and USDCAD after the breaks of important USD resistance in these pairs in recent days.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Apr. CPI
- 1230 – US Apr. Real Average Hourly Earnings
- 1600 – US Fed’s Bostic (non-voter) to speak
- 1800 – US 10-year T-Note auction
- 2301 – UK Apr. RICS House Price Balance
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