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US jobs data to keep FX moves in recent ranges
FX View:
The US dollar moves this week versus G10 were all largely within a +/-1% range which masks the very large moves we have had in rates markets as market participants continue to drive yields higher in anticipation of further monetary tightening and/or central banks being much slower to reverse course by cutting rates in 2024. The US jobs report released this afternoon was we believe in a range that provides no reason to push rates further higher but equally no reason to retrace this recent move higher in yields. The 209k increase in nonfarm payrolls was weaker than consensus, especially when the -110k revision to previous months is included. But the average hourly wage data was stronger than expected. The focus now shifts to the CPI data next week but as of now it seems highly likely that the FOMC will hike by a further 25bps on 26th July. While this is priced, it will still help provide support for the dollar but possibly ensure recent FX ranges remain intact.
USD WITHIN RELATIVELY NARROW TRADING RANGES THIS WEEK
Source: Bloomberg, 14:00 BST, 7th July 2023 (Weekly % Change vs. USD)
Trade Ideas:
We are recommending a new short USD/JPY trade idea alongside maintaining our long EUR/USD and AUD/NZD trade ideas.
Sentiment Analysis on FOMC Conference Transcripts:
Our analysis on the recent FOMC press conference transcript identifies that core inflation and labour market tightness have become of increased concern for the Fed when setting policy.
FX Views
JPY: We expect a YCC change – USD/JPY set to fall sharply
The yen this week has performed better than expected given the scale of move in short-term yields in the US. The jobs data today from the US was mixed with the NFP gain weaker but wage growth stronger and following the strong ADP and ISM data yesterday, it is now highly likely that the FOMC will hike by 25bps at its meeting in July. However, the relative policy trade that has been so popular in driving USD/JPY higher through this global inflation shock is no longer as obvious a trade. The BoJ meets on 28th July, two days after the FOMC and we see it as more likely than not that the BoJ will shift its policy by altering the current YCC framework. The 10yr JGB yield is now picking up but remains well below previous highs close to the top of the current +/-50bps range around zero percent although this is more in sympathy with the move in global yields rather than a pick-up in YCC speculation – but there is certainly a risk of YCC speculation growing over the next three weeks.
We believe there are a number of factors that suggest a move to alter YCC at this month’s policy meeting. Firstly, let’s remember right back to when Governor Ueda was first nominated. In his Diet hearing on 24th February he stated that it was “sometimes hard to avoid surprises” in managing monetary policy. We have made the point in that context that effectively every meeting is a live meeting for a possible YCC change. Changing YCC at its own choosing is a far better scenario for the credibility of the BoJ than changing due to intensifying speculation with10yr yields constantly pressuring the sustainability of the policy. In that sense a July change is perfect timing given the limited speculation, underlined by the 10yr JGB yield trading at 0.42% today.
Secondly, prior to the end of the Diet for the summer recess there had been a risk that PM Kishida would call a snap election that would then take place, probably in August. That would have made it extremely difficult for the BoJ to make a policy change. PM Kishida decided against that and it now could be later in the year leaving a potentially less complicated time politically in July to act rather than possibly later in the year. Thirdly, Governor Ueda in Sintra Portugal last week stated that the policy committee has a higher confidence in inflation falling back in H2 than it has for inflation picking up in 2024. He added that merely having stronger confidence in the current forecast of a pick-up in inflation next year could be enough to alter YCC. We see that as a relatively low bar for a policy change. The fact that the BoJ will also update those forecasts at
USD/JPY UNDERPERFORMING VS US YIELD CHANGES
Source: Bloomberg, Macrobond & MUFG GMR
BROADER USD MOVE MAY BE WEIGHING ON USD/JPY
Source: Bloomberg, Macrobond & MUFG GMR
the July meeting reinforces the potential for a July hike given the forecasts could provide an additional communication tool to justify the move. As a reminder the BoJ currently forecasts core nationwide CPI of 1.8% in FY23 and 2.0% in FY24. The core-core forecasts are 2.5% and 1.7% respectively. In further comments this week from the BoJ, Deputy Governor Uchida was clear to separate policy in regard to the -0.10% overnight rate and YCC. He dismissed the idea of a change in the short-term rate but added that a YCC change would require a “balanced” approach considering the easing impact and market functioning. That interview to us points to far less appetite to persist with YCC and the possibility of a strategy of keeping negative rates as an anchor to long-term rates after YCC is altered.
The cash earnings data released today certainly will add to the case that the conditions for more sustained inflation are building. Cash earnings YoY growth accelerated from 0.8% in April to 2.5% in May, more than double the consensus of 1.2%. Scheduled cash earnings for full-time workers accelerated from 1.4% in April to 2.2% in May, the highest level since 1997. The growth rate was much more consistent with the results from the Shunto wage negotiations that culminated with an agreed increase of 2.12% in the final figure as of 3rd July. Governor Ueda in Sintra last week stated that the BoJ believes wage growth “slightly to well above” 2% would be consistent with the BoJ achieving its price stability goal. Today’s data could, if required, be used as one fundamental development that justified a change to the YCC framework.
The yen is currently the 2nd best performing G10 currency this week and the outperformance is all the more telling given the significant jump in US yields in response to strong US economic data. However, what was notable this week was the fact that the 2yr OIS swap in Japan has stirred and while a 3bp jump is tiny in the global context, it was the largest move higher since March. Positioning in JPY also remains substantially short and IMM data shows Leveraged short JPY positioning currently close to the highest since the March-May 2022 period. The fact that the rates market in Japan is beginning to show some upward pressure suggests market expectations on a policy change later this month may be starting to increase. Add to that the more persistent rhetoric from the MoF expressing opposition to continued JPY depreciation and you have the conditions for some lightening of JPY shorts. Our own USD/JPY short-term valuation model is already around 4 big figures overshooting. If YCC is changed, we see scope for a 5-10 big figure drop to materialise over a number of weeks following the announced change.
It is for this reason we have our current end-Q3 USD/JPY forecast set at 136.00. If you consider a near 5-big figure drop in USD/JPY in December on the day YCC was altered then we see a change under new leadership now as having an even larger impact, especially given USD/JPY to us is more stretched than it was back in December.
HIGHEST FULL-TIME WAGE GROWTH SINCE 1995
Source: Bloomberg, Macrobond & MUFG
LEVERAGED FUNDS REMAIN VERY SHORT JPY
Source: Bloomberg, Macrobond & MUFG
G10 FX: Currency weakness is becoming bigger concern
The worst performing G10 currencies this year have been the NOK (-8.1% vs. USD), JPY (-8.0%) and SEK (-4.3%). The SEK has even fallen to a new record low against the EUR this week. EUR/SEK has broken above the high from during the Global Financial Crisis in March 2009 at 11.790 and is moving within touching distance of the 12.000-level. In the process the JPY and Scandi currencies have become more deeply undervalued which is fuelling speculation over whether domestic policymakers will intervene to support their currencies. The one G10 central bank that has been intervening this year to support their currency has been the SNB who continues to view a stronger CHF as helpful to dampen upside inflation risks.
Japanese officials have already stepped up verbal intervention to slow the pace of the JPY sell-off as USD/JPY has moved closer to levels from late last year when Japan last intervened to support the JPY. Japanese Finance Minister Suzuki has told reporters that the government must respond appropriately to any excessive moves in the currency market and described recent moves in the JPY as “sudden” and “one-sided”. It follows a similar play book to last year when verbal intervention was then followed up by direct intervention to buy the JPY when USD/JPY rose up to 146.00 and then 152.00. Direct intervention totalled USD65 billion. While the period of intervention coincided with the USD/JPY peaking out in October, we would argue that the reversal lower in US yields was more important. The 10-year UST bond yield hit a high of 4.34% on 21st October which is still the peak in this cycle. The 10-year UST yield has though just climbed back above 4.00% making it more difficult for Japanese officials to dampen upward momentum for USD/JPY through verbal intervention alone.
Domestic policymakers in Norway and Sweden have also expressed more concern recently over domestic currency weakness. The Norges Bank stepped up the pace of rate hikes by delivering a larger 50bps hike last month in response to upside inflation risks. It has also slowed the amount of daily FX purchases to NOK1 billion/day in July although that is in response to reduced revenues from the oil & gas industry rather than a desire to offer more support for the NOK. At the same time, the Riksbank is taking action to provide more support for the SEK by announcing plans to speed up the pace of quantitative tightening to SEK5 billion/month, and is considering plans to hedge around a quarter of the FX reserve holdings (SEK410 billion) through FX forwards & swaps. Purchases are not expected to begin until the autumn at the earliest.
After taking into consideration recent actions undertaken by policymakers in Japan and Scandinavia, we are not convinced yet that they are sufficient to trigger a sustained reversal of the weakening trends for their domestic currencies (JPY, NOK & SEK). The CHF is better placed to continue benefitting from the SNB intervention.
STRONG CHF WELCOMED BY SNB
Source: Bloomberg, Macrobond & MUFG
SNB IS RUNNING DOWN RESERVES TO SUPPORT CHF
Source: Bloomberg, Macrobond & MUFG
Weekly Calendar
|
Ccy |
Date |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
JPY |
07/10/2023 |
00:50 |
BoP Current Account Balance |
May |
¥1876.6b |
¥1895.1b |
!! |
|
CNY |
07/10/2023 |
02:30 |
CPI YoY |
Jun |
0.2% |
0.2% |
!! |
|
NOK |
07/10/2023 |
07:00 |
CPI YoY |
Jun |
-- |
6.7% |
!! |
|
SEK |
07/10/2023 |
08:30 |
Riksbank Minutes From June Meeting |
!! |
|||
|
EUR |
07/10/2023 |
09:30 |
Sentix Investor Confidence |
Jul |
-- |
-17.0 |
!! |
|
GBP |
07/10/2023 |
20:00 |
BoE Governor Bailey speaks |
!!! |
|||
|
GBP |
07/11/2023 |
07:00 |
Employment Change 3M/3M |
May |
-- |
250k |
!!! |
|
EUR |
07/11/2023 |
07:00 |
Germany CPI EU Harmonized YoY |
Jun F |
-- |
6.8% |
!! |
|
EUR |
07/11/2023 |
10:00 |
ZEW Survey Expectations |
Jul |
-- |
-10.0 |
!! |
|
NZD |
07/12/2023 |
03:00 |
RBNZ Official Cash Rate |
5.50% |
5.50% |
!!! |
|
|
GBP |
07/12/2023 |
07:00 |
BoE releases Financial Stability Report |
!! |
|||
|
USD |
07/12/2023 |
13:30 |
CPI YoY |
Jun |
3.0% |
4.0% |
!!! |
|
EUR |
07/12/2023 |
14:45 |
ECB's Lane Speaks |
!!! |
|||
|
CAD |
07/12/2023 |
15:00 |
Bank of Canada Rate Decision |
4.75% |
4.75% |
!!! |
|
|
USD |
07/12/2023 |
19:00 |
Fed releases Beige Book |
!! |
|||
|
CNY |
07/13/2023 |
Tbc |
Trade Balance |
Jun |
$74.40b |
$65.81b |
!! |
|
GBP |
07/13/2023 |
07:00 |
Monthly GDP (MoM) |
May |
-- |
0.2% |
!!! |
|
EUR |
07/13/2023 |
07:45 |
France CPI EU Harmonized YoY |
Jun F |
-- |
5.3% |
!! |
|
GBP |
07/13/2023 |
09:30 |
BoE releases Credit Conditions Survey |
!! |
|||
|
EUR |
07/13/2023 |
10:00 |
Industrial Production SA MoM |
May |
-- |
1.0% |
!! |
|
EUR |
07/13/2023 |
12:30 |
ECB Publishes Account of June Meeting |
!! |
|||
|
USD |
07/13/2023 |
13:30 |
PPI Final Demand YoY |
Jun |
-- |
1.1% |
!! |
|
USD |
07/13/2023 |
13:30 |
Initial Jobless Claims |
39630 |
-- |
-- |
!! |
|
JPY |
07/14/2023 |
05:30 |
Industrial Production MoM |
May F |
-- |
-1.6% |
!! |
|
SEK |
07/14/2023 |
07:00 |
CPI YoY |
Jun |
-- |
9.7% |
!!! |
|
EUR |
07/14/2023 |
10:00 |
Trade Balance SA |
May |
-- |
-7.1b |
!! |
|
USD |
07/14/2023 |
13:30 |
Import Price Index YoY |
Jun |
-- |
-5.9% |
!! |
Source: Bloomberg, Macrobond & MUFG GMR
Key Events:
- There are two G10 central bank policy meetings in the week ahead. The RBNZ and BoC will both provide updates on Wednesday. The RBNZ’s policy update is expected to have less impact on financial markets given that they sent a strong signal at their last meeting in May that their rate hike cycle had come to an end after lifting the policy rate to a peak of 5.50%. It is unlikely that the RBNZ will have significantly altered their rates outlook since May. The worst outcome for the NZD would be if the RBNZ started to consider/signal the potential for rate cuts later this year.
- In contrast to the RBNZ, the BoC delivered a hawkish policy surprise at their last meeting when they resumed rate hikes by lifting the policy rate to 4.75% in June. The Canadian rate market and Canadian economists surveyed by Bloomberg both view the upcoming rate decision as finely balanced (17bps priced in) which is likely to result in a bigger move in CAD. On balance we expect the BoC to leave the policy rate hold rather than deliver back to back 25bps hikes which would be a big hawkish shift after they left rates on hold through most of the 1H 2023.
- The main economic data releases in the week ahead will be: i) the US CPI report for June (Wednesday), ii) UK labour market report (Tuesday) and iii) UK GDP report for May. The US CPI report is expected to provide further evidence that disinflation pressures in the US economy continue to build as headline inflation moves back closer to the Fed’s target. Core inflation would have to fall back more quickly than expected to cast doubt on the Fed’s plans to hike again later this month. In the UK, the latest wage data will attract the most market attention in the week ahead. There are signs that the labour market is softening but wage growth remains uncomfortably high for the BoE which is fueling expectations for the policy rate to reach a peak of close to 6.50%.
