FX Weekly

To read a full report, please download PDF 

US CPI data fails to lower US yields

FX View:

The US dollar has strengthened this week versus all G10 currencies although gains were marginal versus EUR and GBP. The resilience of US yields this week is notable with the drop in yields after another US CPI report showing disinflation is ongoing quickly reversing. Some hawkish Fed rhetoric and a modestly weaker 30yr UST bond auction has helped support yields. But additionally, the continued lack of slowdown in activity data may mean investors start to question the extent of rate cuts priced in for 2024. In any case, short-term spreads are indicative of support for the dollar being maintained. In a low volatility market that suggests yield and carry will be important and hence points to the potential for some moderate renewed strength for the dollar, albeit within current medium-term trading ranges. China developments bear watching as a potential source of market volatility.

USD STRENGTH VERSUS ALL G10 CURRENCIES, BUT MODEST VS EUR  

Source: Bloomberg, 13:15 BST, 11th August 2023 (Weekly % Change vs. USD)

Trade Ideas:

We have instigated a short EUR/USD trade idea to reflect the potential bias favouring yield and hence the dollar over the short-term.

 

JPY Flows:

This week we cover the monthly International Transactions in Securities for the month of July which revealed renewed selling of foreign bonds by Japanese investors. This likely reflected the renewed swings in yields. In addition, foreign investors were sellers of Japan bonds, which likely reflected trading leading up to the YCC change that took place on the final trading day of the month.

 

FX Correlation Tree:

This week our correlation tree analysis flags a change in relationship between equities and domestic government bonds, and what that mean for the performance of GBP going forward. We also identify a strengthening in relationship between AUD and Copper suggesting greater China influence on AUD.

FX Views

Short-term dynamics points to US dollar gains

The big macro event of the week – the US CPI data release – has passed and from an FX perspective we remain within recent ranges with the data broadly consistent with market expectations. Yields in the US did drop in the aftermath of the release given the data still confirmed that the disinflation trend remains in place as inflation pressures continue to ease. Tellingly, that drop in yields was not sustained and an initial immediate 8bps drop in the 2-year yield from the pre-release level turned to a 5bp gain. Some of that then reversed but higher PPI data has meant yields remain higher from the 4.80% pre-CPI release level. The 10-year yield is more notably higher since the CPI data – up around 12bps from the pre-release level. The resilience in US yields may well be indicative of increased support for the dollar over the short-term, especially given the potential for a quiet period ahead over the coming weeks. If there is no sudden risk-off event, yields will matter and carry could help drive the dollar stronger over the short-term.

The resilience of yields is telling given the details of the CPI data yesterday were very positive in our view. While overall the data was in line with expectations, the resilience of rental inflation means the ex-shelter portion of CPI was weaker than expected. There is a strong expectation that rent of shelter will fall and each month that it doesn’t highlights the fact that other components are weakening more notably. This is clearly highlighted by the fact that over the last three months overall CPI ex-shelter has recorded m/m changes of 0.0% (July), 0.1%, and -0.1%. The core CPI ex-shelter m/m gains in the same months were -0.1%, 0.0% and 0.3%. Yes, the closely watched supercore annual rate jumped from 4.01% to 4.15% but this is to ignore the more important run-rate on a m/m basis, which showed a 0.19% m/m gain after a 0.0% change in June. Whatever way you slice and dice the data, outside of rents the evidence of notable disinflation is compelling.

To think that certain Fed speakers believe further monetary tightening will still be required is bizarre to us! This is one factor why US yields have been resilient post the CPI data. Fed President Daly stated after the CPI data that there was “still work to do” and that it was a long time until the September FOMC meeting. The comment followed similar comments from Governor Bowman earlier in the week who stated that “I expect that additional increases will likely be needed”. This may reflect a strategy of trying to avoid any unwarranted premature easing of financial conditions which is proving successful and has limited the scope for yields to fall. Secondly, while the bond auctions this week generally went reasonably well, the 30-year auction last night was the weakest of the three and added to the upward pressure on longer-term yields. The yield on the 30-year auction came in at 4.189%, higher than the earlier-when-issued yield of 4.175% highlighting a degree of weakness despite higher market yields. The bid-to-cover was decent though (2.42 vs 2.35 avg from last 6 auctions).

US CORE CPI, EX-SHELTER – 3MTH ANNUALISED

Source: Bloomberg, Macrobond & MUFG GMR

ACTUAL RENTS DROP POINTS TO CPI DROP SOON

Source: Bloomberg, Macrobond & MUFG GMR

It did put some modest upward pressure on yields which was no doubt reinforced by the poor budget deficit data released afterwards. The Treasury department released July budget figures which revealed a fiscal year-to-date budget deficit of USD 1.6 trillion with two months remaining, considerably larger than the USD 726bn in the same period last fiscal year. The breakdown is concerning given government receipts are down 10% and are lower than CBO estimates due to smaller than expected individual and corporate tax revenues. The individual tax data suggest that reported resilience of the labour market in the NFP data may not be a true reflection of the health of the US labour market. Government expenditures in contrast were 10% higher.

While the worsening fiscal position is a dollar negative, it is a more medium-term factor and is consistent with our view that the dollar will weaken later in the year. However, over the short-term as stated before, yields will matter in a low volatility market. With little further top tier data to deal with from the US, it seems likely that US yields could remain at these higher levels. The FOMC minutes next week will likely highlight the scope for further tightening while the Fitch downgrade and fiscal position will support longer-term yields. While rate cuts priced for 2024 will curtail dollar strength, there is a risk without weaker economic activity data that the market could gradually reduce the extent of easing priced which could support yields further and lift the dollar. The risk of current low vol conditions changing may lie in Asia with the property sector continuing to cause uncertainty in China given the backdrop of continued weak economic data. Events surrounding Country Garden will need to be monitored closely over the coming days but increased risk aversion in China would likely still support the dollar.

Notwithstanding that risk, on the assumption that FX and rates volatility is subdued over the coming weeks, carry appetite could pick up which should be supportive for the dollar over the short-term. The failure of EUR/USD to sustain levels over 1.1000 this week may be a technical signal of a further retracement lower from here.

DXY-WEIGHTED YIELD SPREAD TO SUPPORT USD

Source: Bloomberg & Macrobond & MUFG Research

2YR EZ-US SPREAD POINTS TO LOWER EUR/USD

Source: Bloomberg & Macrobond & MUFG Research

Weekly Calendar

Ccy	Date	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
JPY	08/15/2023	00:50	GDP Annualized SA QoQ	2Q P	2.9%	2.7%	!!
AUD	08/15/2023	02:30	RBA Minutes				!!!
AUD	08/15/2023	02:30	Wage Price Index YoY	2Q	3.8%	3.7%	!!!
CNY	08/15/2023	03:00	Retail Sales YoY	Jul	4.0%	3.1%	!!!
JPY	08/15/2023	05:30	Industrial Production MoM	Jun F	--	2.0%	!
GBP	08/15/2023	07:00	Payrolled Employees Monthly Change	Jul	--	-9k	!!
GBP	08/15/2023	07:00	Average Weekly Earnings 3M/YoY	Jun	--	6.9%	!!!!
GBP	08/15/2023	07:00	ILO Unemployment Rate 3Mths	Jun	--	4.0%	!!!
GBP	08/15/2023	07:00	Employment Change 3M/3M	Jun	--	102k	!!!
USD	08/15/2023	13:30	Retail Sales Advance MoM	Jul	0.4%	0.2%	!!!
USD	08/15/2023	13:30	Retail Sales Control Group	Jul	0.4%	0.6%	!!!
CAD	08/15/2023	13:30	CPI YoY	Jul	2.9%	2.8%	!!!
CAD	08/15/2023	13:30	CPI Core- Median YoY%	Jul	--	3.9%	!!!
CAD	08/15/2023	13:30	Empire Manufacturing	Aug	-0.8	1.1	!
USD	08/15/2023	16:00	Fed's Kashkari speaks				!!
GBP	08/16/2023	07:00	CPI MoM	Jul	--	0.1%	!!!!
GBP	08/16/2023	07:00	CPI YoY	Jul	--	7.9%	!!!!
GBP	08/16/2023	07:00	CPI Core YoY	Jul	--	6.9%	!!!!
EUR	08/16/2023	10:00	GDP SA QoQ	2Q P	--	0.3%	!!
EUR	08/16/2023	10:00	Employment QoQ	2Q P	--	0.6%	!
USD	08/16/2023	13:30	Housing Starts	Jul	1445k	1434k	!
USD	08/16/2023	14:15	Industrial Production MoM	Jul	0.4%	-0.5%	!
USD	08/16/2023	14:15	Manufacturing (SIC) Production	Jul	0.0%	-0.3%	!
USD	08/16/2023	19:00	FOMC Meeting Minutes	Jul-26	--	--	!!!!
JPY	08/17/2023	00:50	Trade Balance Adjusted	Jul	-Â6.0b	-Â¥553.2b	!
AUD	08/17/2023	02:30	Employment Change	Jul	15.0k	32.6k	!!!
USD	08/17/2023	13:30	Philadelphia Fed Business Outlook	Aug	-10.6	-13.5	!!
USD	08/17/2023	15:00	Leading Index	Jul	-0.4%	-0.7%	!
JPY	08/18/2023	00:30	Natl CPI Ex Fresh Food YoY	Jul	3.1%	3.3%	!!
JPY	08/18/2023	00:30	Natl CPI Ex Fresh Food, Energy YoY	Jul	4.3%	4.2%	!!!!
GBP	08/18/2023	07:00	Retail Sales Ex Auto Fuel MoM	Jul	--	0.8%	!!!
EUR	08/18/2023	10:00	CPI MoM	Jul F	--	-0.1%	!!!
EUR	08/18/2023	10:00	CPI YoY	Jul F	--	5.5%	!!!
EUR	08/18/2023	10:00	CPI Core YoY	Jul F	--	5.5%	!!!

Source: Bloomberg, Macrobond & MUFG GMR

 Key Events:

 

• In terms of central bank speakers August will be quiet and next week we only have one Fed president speaking and nothing else scheduled. So from a central bank perspective next week will be all about meeting minutes. First up will be the RBA minutes from the meeting at the start of August when the RBA left rates on hold again. There were more notable changes to the statement that suggested the RBA is more confident inflation is coming down – so the minutes will be important in seeing what lay behind that. The FOMC hiked as expected but Chair Powell was much less forthright on additional hikes taking place despite the dots indicating the FOMC expects to hike again. The minutes may throw some light on possible changes in thinking on future rate moves.

 

• Other than that, the key data releases will focus on inflation with inflation data released in the UK, Canada, Japan and the euro-zone. With UK inflation more elevated and the BoE signaling most clearly the potential to hike again, the UK data has the most potential to be market moving. Employment, wages and retail sales data mean it will be a heavy week of key economic releases in the UK.