Modest rebound for USD as fears over US labour market ease

USD/JPY: Initial claims provide some relief alongside earthquake warning

The USD has continued to trade at modestly stronger levels following the release yesterday of the latest weekly initial claims report. The dollar index hit an intra-day high yesterday of 103.55 but has since given back some of those initial gains. The initial claims report has had a bigger impact in helping boost investor risk sentiment. The S&P500 index closed higher yesterday by 2.3% and has now reversed most of the losses recorded at the start of his week. The positive momentum has carried over into Asian equity markets overnight with the Nikkei 225 index rising by around 0.6% although is still on track to finish up modestly lower (-2.5%) for the week following the plunge of around 13% recorded on Monday. The rebound in equity markets towards the end of this week has provided some relief for the high beta G10 currencies. The New Zealand dollar, Australian dollar, Norwegian krone and the pound have been the best performing G10 currencies over the last couple of days while the low yielding, safe haven currencies of the yen and Swiss franc have given back some of their recent strong gains. The main trigger for the further improvement in global investor risk sentiment yesterday was the release of the latest weekly initial claims report that has helped to ease concerns over a sharper slowdown for the US labour market.

Those concerns had intensified after the release last Friday of the weaker nonfarm payrolls report for July.  However, the latest initial claims data remains more consistent with a mild slowdown. Weekly claims dropped back to 233k from 250k in the prior week. The weekly drop in claims was mainly driven by Texas where claims had been lifted in previous weeks by disruption caused by Hurricane Beryl in early July. In response to the drop in initial claims and easing of concerns over a sharper slowdown in the US labour market, the US rate market has moved to scale back expectations for Fed rate cuts. It has resulted in the 2-year US Treasury yield rising back above 4.00% after it hit a low at the start of this week of 3.65%. While the Fed is still judged as more likely to start their rate cut cycle in September by delivering a larger 50bps cut, the US rate market has become less confident in that outcome and has scaled back the number of cuts priced in by September to around 39bps.

The other news yesterday that could potentially have an impact on the yen was the warning from the Japanese government over the risk of mega earthquake in the Nankai trough. The zone, where the Philippine sea plate subducts underneath the Eurasian continental plate, sees a major tremor occurring in 100-150-year cycle according to Bloomberg. The precautionary warning for an increased risk of a quake was triggered yesterday after a 7.1 magnitude earthquake struck off the coast of Kyushu. The precautionary mega earthquake warning represents another potential upside risk for the yen in the near-term. The last major earthquake that had a significant impact on the yen was back in March 2011. After the earthquake struck on 11^th March, USD/JPY dropped sharply from an intra-day high of 83.300 to an intra-day low of 76.250 on 17^th March which was a fall of -8.5%. If that price action is repeated, it could potentially trigger a further unwind of yen carry trades.

THE YEN STRENGTHENED SHAPLY AFTER 2011 EARTHQUAKE

Source: Bloomberg, Macrobond & MUFG GMR

CNY: What’s been driving a stronger renminbi?

The main economic data release overnight was the latest CPI report from China for July. The report revealed that headline inflation picked up modestly by 0.3 points to 0.5% in July. However, it does not change the fact that inflation pressures remain low reflecting weak domestic demand. The core measure on inflation fell to 0.4% in July from 0.6% in May-June. At the same time, the release of the latest PPI report revealed that producer price deflation continued as it fell by an annual rate of -0.8% in July. Overall, the inflation developments alongside the recent loss of growth momentum in Q2 will keep pressure on the PBoC to lower rates further his year.

The renminbi has given back some of its recent gains over the past week. After hitting an intra-day low of 7.1153 om 5^th August, USD/CNY has since risen back towards the 7.1800-level. The renminbi has benefitted alongside the yen and other Asian currencies (most notably the MYR & THB) from the recent bout of position liquidation as popular short positions have been pared back. It has meant that the renminbi has strengthened following the PBoC’s decision to cut rates further towards the end of last month. While yields in China have continued to fall over the past month, it has been  more than offset by the larger drop in US yields as market participants have moved to price in a higher probability of more aggressive Fed rate cuts. At the same time, downside risks to Asian currencies from another Trump trade war have eased recently as well since Biden decided not to seek re-election.  

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian CPI (YoY)	Jul	1.3%	0.8%	!
CA	13:30	Employment Change	Jul	26.9K	-1.4K	!!

 

Source: Bloomberg