FOMC fails to lift USD and probable 2nd intervention hits USD/JPY

USD: Does probable MoF action highlight new strategy?

We stated in yesterday’s monthly Foreign Exchange Outlook (here) that it was going to be difficult for Fed Chair Powell to ‘out-hawk’ financial market pricing and that was certainly true with Powell’s clear message of ‘higher for longer’ prompting 2-year UST note yields to drop close to 10bps before partially recovering. That prompted some dollar depreciation which was partially reversing toward the end of trading when there was a sharp plunge in USD/JPY approaching 5 big figures. There has been no official confirmation from Tokyo and Vice Finance Minister for International Affairs Masato Kanda merely stated that he had “nothing to say” on the matter declining again to confirm or deny intervention, similar to Monday. 

Firstly in regard to the Fed, there was nothing dramatically surprising by the FOMC outcome. Inevitably the FOMC indicated greater concern over inflation by including in the statement that “there has been a lack of progress toward the Committee’s 2% inflation objective”. Importantly, the statement still included the reference to the conditions for cutting rates indicating that bias remained. Chair Powell was of course asked about the idea of a rate hike but this was dismissed as “unlikely” adding that “over time” policy will be sufficiently restrictive. If anything could be classed as a surprise then the size of the taper in QT of US Treasury securities from USD 60bn to USD 25bn was it, which at the margin may have helped depress yields. The key message though was that the timing on arriving to the position to cut rates would depend on incoming data but Powell maintained a view that inflation “over this year” will move down. We certainly didn’t get the sense that this was a communication consistent with just a little over one rate cut this year, as is currently priced.

In regard to the probable intervention that took place toward the end of the New York trading session after the FOMC it clearly shows a determination from the MoF that could help to deter the scale of speculative yen selling. We believe the MoF has done this to send a clear message that this won’t necessarily be like Sept/Oct 2022. In September 2022 USD/JPY was back very close to the intervention level within two weeks and then went through before the second bout of intervention in October five big figures higher than the September intervention. That doesn’t look like it will happen this time. Furthermore, the probable intervention came as USD/JPY was weakening after the FOMC failed to lift the dollar more broadly suggesting a strategy that could be more forceful than in 2022 and certainly less predictable. A weak US CPI print in November alleviated the need for more intervention in 2022. If the US data doesn’t help this time, the MoF will certainly have to intervene more than in 2022.

FED FUNDS & ELECTION YEARS – POWELL YESTERDAY DENIED THE ELECTION WOULD INFLUENCE FOMC POLICY DECISIONS

Source: Macrobond, Bloomberg & MUFG Research

USD: Mixed flow of data continues  

Ahead of the FOMC meeting yesterday, the data flow from the US in particular covering the labour market was mixed – we had another strong ADP employment report (+192k vs 183k expected from upwardly revised 208k in March) that will solidify NFP expectations of another strong report. The final estimates for ADP indicates NFP jobs growth has a tendency to show larger jobs gains and you have to go back to July last year to find an outcome when the ADP employment change was larger. The scale of increase in ADP certainly doesn’t suggest any imminent deterioration in the labour market. However, other data sets on the labour market still indicates a weaker market than implied by either the ADP or NFP data. The JOLTS data continues to confirm a trend weaker in job openings and importantly with that a falling quits rate that is indicative with a further deceleration in wage growth (see above). The drop to 2.1% in the quit rate is consistent with pre-covid conditions when the average hourly earnings annual growth rate was below 3.0%.

Powell’s greater concerns over recent inflation data was on show yesterday too with the ISM manufacturing prices paid index jumping to 60.9 in April, the highest since Jun 2022 when headline US CPI was peaking at over 9.0%. This index tends to move with commodity prices when there has been any notable changes month to month and the Bloomberg Commodity Index jumped significantly toward the end of March into April. The average for the index in April was about 4% higher than in March. However, the index has fallen sharply in the last two days while supplier delivery times shortened and the backlog of orders diminished.

But while we can argue that inflation risks remain less concerning than implied by Fed policy expectations, the data in general continues to point to no urgency to cut rates, as was communicated clearly by Powell. Yesterday we published our monthly Foreign Exchange Outlook (here) and we have made some moderate adjustments stronger to our USD forecast profile. However, we have maintained the view of the dollar weakening into year-end as the Fed cuts rates by more than current market pricing. There are three payrolls and CPI reports before the July meeting making that still a very plausible meeting for the first rate cut.

JOLTS QUIT RATE VERSUS AVERAGE HOURLY EARNINGS YOY RATE

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:30	procure.ch PMI	Apr	45.5	45.2	!!!
IT	08:45	Italian Manufacturing PMI	Apr	50.3	50.4	!!
FR	08:50	French Manufacturing PMI	Apr	44.9	46.2	!!
GE	08:55	German Manufacturing PMI	Apr	42.2	41.9	!!
EC	09:00	Manufacturing PMI	Apr	45.6	46.1	!!
US	12:30	Challenger Job Cuts	Apr	--	90.309K	!
US	12:30	Challenger Job Cuts (YoY)	--	--	0.7%	!
US	13:30	Continuing Jobless Claims	--	1,800K	1,781K	!!
US	13:30	Initial Jobless Claims	--	212K	207K	!!!
US	13:30	Jobless Claims 4-Week Avg.	--	--	213.25K	!
US	13:30	Nonfarm Productivity (QoQ)	Q1	0.8%	3.3%	!!
US	13:30	Unit Labor Costs (QoQ)	Q1	3.6%	0.4%	!!
US	13:30	Trade Balance	Mar	-69.50B	-68.90B	!!
CA	13:30	Exports	Mar	--	66.62B	!
CA	13:30	Imports	Mar	--	65.23B	!
CA	13:30	Trade Balance	Mar	1.10B	1.39B	!!
CA	13:45	BoC Senior Dep Gov Rogers Speaks	--	--	--	!!
CA	13:45	BoC Gov Macklem Speaks	--	--	--	!!
US	15:00	Durables Excluding Defense (MoM)	Mar	--	2.3%	!
US	15:00	Durables Excluding Transport (MoM)	Mar	--	0.3%	!
US	15:00	Factory Orders (MoM)	Mar	1.6%	1.4%	!!
US	15:00	Factory orders ex transportation (MoM)	Mar	--	1.1%	!
US	15:00	Total Vehicle Sales	--	--	15.50M	!
EC	21:15	ECB's Lane Speaks	--	--	--	!!

 

Source: Bloomberg