FX Weekly
- Jun 07, 2024
To read the full report, please download PDF.
US dollar supported by ‘higher for longer’
FX View:
The power of the US jobs data was on show this afternoon with the momentum shifting notably on the back of a stronger than expected NFP report. The 272k increase was much stronger and while the details (establishment strength vs household weakness & low response rate) still suggest NFP data could be over-stating strength, the data reinforces the risk of the Fed remaining on the side-lines for longer. This week we look ahead to the BoJ meeting next Friday. We expect a change in JGB buying policy and highlight a clear shift in tone from BoJ officials. We also look ahead to the prospect of a possible escalation in trade tensions between Europe and China with Brussels possibly announcing an increase in tariffs on imports of EVs from China. We also have EU election results on Monday although we don’t think the likely shift to the right in parties doing well will have much FX market impact.
CHF & JPY RESILIENCE ON SHOW AS USD RECOVERS
Source: Bloomberg, 15:15 BST 7th June 2024 (Weekly % Change vs. USD)
Trade Ideas:
Given the jobs data today we have cut our long EUR/USD trade view but have established a long MXN/ZAR trade idea based on the view that MXN selling post-election may have become excessive relative to ZAR.
JPY Flows – Balance of Payments :
The monthly MoF flow data on cross-border securities and current account will be released next week. This week we highlight current OTC FX retail margin positioning that indicates reduced exposure to most G10 currencies but EM carry remains in favour.
Sentiment Analysis on ECB Monetary policy statements (including Q&A):
The latest Monetary Policy Statement from the ECB suggests the council remains concerned over a weaker euro-area economy citing subdued demand in the manufacturing and other energy intensive sectors. This has resulted in a fall in net sentiment across a broad range of topics (Commodities, Demand, Economy, Housing, Labour, Manufacturing).
FX Views
JPY: BoJ set to take another tightening step
Next week will be a key week for the yen with global yields taking a lead from the FOMC meeting on Wednesday which will be followed by the BoJ meeting on Friday. The yen is currently the 3rd best performing G10 currency this week and even following the strong jobs data today, the US 2yr yield is down this week. Yen buying flows were also reinforced by increased volatility in some of the more popular carry positions for Japanese retail traders. USD/MXN dropped by nearly 5% this week and this prompted some buying back of the yen versus the peso. Our own flows indicated MXN selling flows versus the yen that on one day this week was 6 times larger than the average over the last 6 months. However, even though we had a rate cut from the ECB this week, EUR/USD this week remains close to unchanged (-0.3%). ECB officials today have been emphasising the need for caution ahead which is supporting yields at higher levels that likely means the yen will remain at relatively weak levels going into the BoJ meeting. That will keep pressure on the BoJ to tighten financial conditions in order to provide support for the yen going forward.
Are there any compelling developments since the last BoJ meeting to justify another change in policy? To recap, the yen fell over 1% on the day of the last meeting on 26th April and a few days later we now know the MoF intervened on two separate days to halt yen depreciation. JGB yields are now higher since the last meeting with both the 2yr and 10yr yields up 5bps and 8bps respectively. Inflation has slowed in line with expectations while the household survey measure of inflation expectations has eased modestly but remains elevated and the 10-yr breakeven is around unchanged since the April meeting, having come down from a new high set toward the end of May. Certainly it’s reasonable to assume that the BoJ will be more mindful of avoiding a repetition of the sharp yen sell-off after the April BoJ meeting given the intervention the MoF then had to undertake. The wage data this week was on the softer side but remains generally at or above the 2% mark with more increases likely to come.
Perhaps the biggest change since the April meeting has been the communication from senior BoJ officials. There have been three speeches given by BoJ officials since the last BoJ meeting with each providing important information.
JAPAN 10YR BREAKEVEN THIS WEEK HIT A NEW RECORD HIGH IN BLOOMBERG DATA SERIES
Source: Bloomberg, Macrobond & MUFG GMR
JAPAN CONSUMER INFLATION EXPECTATIONS HAVE BEEN MOVING HIGHER IN RECENT MONTHS
Source: Bloomberg, Macrobond & MUFG GMR
Governor Ueda in a speech on 8th May highlighted “pronounced labour shortages” in arguing the case that the virtuous cycle between wages and prices was strengthening which is making the BoJ more confident in the potential for achieving the BoJ’s inflation goal. A 2nd speech by Deputy Governor Uchida revealed a stronger level of confidence on changing labour market conditions – in that speech Uchida stated that the labour market had undergone “structural and irreversible” change that could mean the “social norm” of mild deflation was coming to an end. Finally, Board Member Seiji Adachi gave an important speech on 29th May that could be perceived as key guidance on the BoJ’s JGB buying policy. Adachi stated that it was now “conceivable” that the BoJ will slow JGB purchases, adding that in reducing JGB buying it was “desirable for the Bank to do so gradually, while taking comprehensive account of the situation in the bond market in terms of supply and demand conditions, the degree of functioning and liquidity conditions”.
The comments from Adachi and the signs of increased confidence over achieving the virtuous circle between wages and prices means a change in JGB buying policy is likely next week. There appears a strong desire to focus on the continued smooth functioning of the JGB market and hence could simply indicate a very gradual slowing of purchases that will be dictated by maintaining a stable, smooth functioning and liquid JGB market without providing a numerical guide. That approach could however run into trouble if for other reasons volatility picks up and investors are unclear how the BoJ would respond. The alternative approach would be to provide a numerical framework and but given this lacks flexibility would have to be at such a moderate pace that it has limited impact. Our MUMSS Tokyo colleagues estimate a roll-off of JGBs from the BoJ’s balance sheet of JPY 67trn this fiscal year and JPY 74trn in FY25. The current pace of buying implies purchases of about JPY 70trn this fiscal year so there is space to slow purchases to an average of between JPY 5.5trn and JPY 5.0trn that would imply only a modest roll-off of total JGBs held, which currently totals JPY 597trn as of 31st May. Holdings have been stable at around this level since March 2023.
Day-to-day market dynamics may now be changing following the strong US jobs report today and the yen risks being at weaker levels that will elevate pressure to act to avoid further yen weakness through the most recent lows around the 160-level. Still, this doesn’t alter our view on the scale of action taken with a change in JGB buying policy next week followed by a rate hike in July. The resilience in the US, evident in the jobs report of course makes our BoJ scenario more likely. The 10yr US-JP yield spread is still narrowing and June action should support 10yr yields in Japan and limit yen selling. Still, as always, near-term at least while BoJ action like we expect will help ease yen selling, the actions on the US side will be key and the strength of the jobs report does certainly delay the prospect of any turn lower in USD/JPY.
BOJ JGB HOLDINGS HAVE BEEN STABLE
Source: Macrobond & MUFG GMR
BASED ON MUFG FORECASTS 10YR SPREAD TO DROP
Source: Macrobond & Bloomberg & MUFG Research
EUR/USD: What are the main risks to further upside for EUR/USD?
The EUR has strengthened modestly against the USD over the past month. It has resulted in EUR/USD moving back closer to the top of the 1.0500 to 1.1000 trading range that has been in place since late in 2022. The recent move higher for the pair has been mainly driven by the weaker USD leg as the EUR has weakened on average against other G10 currencies since the middle of last month. The EUR (-0.6% vs. USD) has been one of the poorer performing G10 currencies since the middle of last month alongside the AUD (-1.4%), JPY (-1.3%) and CAD (-1.0%).
The EUR has derived some support this week from the ECB’s latest policy update. While the ECB started to cut rates as widely expected by 25bps to 3.75%, the updated forward guidance struck a relatively hawkish tone. As we highlighted in yesterday’s FX Focus report (click here), the ECB was non-committal over the future rate path and attempted to dampen talk that it was the start of a rate cut cycle. There was no strong signal over the timing of the next rate cut although they did push back against expectations for another cut as soon as the next policy meeting in July. The updated guidance alongside upward revisions to the ECB staff inflation forecasts for this year and next year have encouraged the euro-zone rate market to scale back expectations for ECB rate cuts through the rest of this year. There are now only 32bps of cuts priced in by year end indicating that our forecast for a third rate cut is now under greater scrutiny. With the next “live” ECB policy someway off in September, it gives the ECB plenty of time to assess the incoming economic data in the coming months.
One area of focus next week will be the much anticipated announcement from the European Commission on its decision on Chinese electric vehicle tariffs. The provisional tariff announcement has reportedly been delayed from 5th June until 10th June following the EU Parliament elections this weekend although the date has not been officially confirmed. The European Commission launched an investigation in October into whether battery electric vehicles manufactured in China were receiving distorting subsidies and warranted extra tariffs. The Commission can impose provisional anti-subsidy duties nine months after the start of the probe. Any decision taken by what would be an outgoing EU administration would be up for confirmation or amendment within the next four months. If the Commission decides to raise tariffs from the current 10% levy to curb Chinese EV sales in Europe, it is likely to prompt retaliations from China that could hurt European automakers. China’s current levy on all car imports from the EU is already set higher at 15%, and they have warned it could be raised to 25%. According to reports, German manufacturers generate between 20-23% of their global profits from China. Not surprisingly, the German auto industry has been lauding the qualities of free trade and lobbying against tariff increases. Previous EU decisions have shown a more lenient or free-market approach when covering solar panels and semi-conductors. Furthermore, China has warned it could also raise tariffs on aviation and agricultural imports from the EU.
EUR PERFORMANCE EXCLUDING AGAINST USD
Source: Bloomberg, Macrobond & MUFG GMR
SHORT-TERM YIELD SPREAD MOVES IN FAVOUR OF EUR
Source: Bloomberg, Macrobond & MUFG GMR
It follows hot on the heels of last month’s decision from the Biden administration to raise tariffs on an additional USD18 billion worth of imports from China including raising the tariff on all electric vehicles from 27.5% to 100%. The announcement has had limited market impact as the size of goods impacted was relatively small at 0.5% of total exports for China. However, trade flows could be impacted more by tit-for-tat tariff hikes between the EU and China given stronger trade links which could prove more market moving. As the Atlantic Council highlighted in a recent opinion piece (click here), China’s battery electric vehicle (BEV) exports surged by 70% last year to USD34.1 billion and Europe is the largest recipient of Chinese BEV exports accounting for nearly 40% of the total. In the final quarter of last year, Chinese manufacturers’ share of the Western European new BEV passenger car market stood at 9.3% compared to just 0.5% in 2019. In contrast, China exports only USD368 million of BEV exports to the Us in 2023. In light of these developments, we believe the European Commission’s upcoming announcement poses some downside risk for the EUR in the week ahead. Tit-for-tat tariff hikes could trigger a setback for EUR/USD’s recent upward trend.
The other key events in the week ahead for EUR/USD performance will be from the US. The release of the latest US CPI report for May and FOMC meeting on Wednesday will both be important for driving the USD leg. Market participants are more wary of a hawkish policy update from the Fed next week after today’s strong US NFP report both for employment growth and wages. For the USD to continue trending weaker, it will require another softer US CPI report and for the Fed it signal that it remains confident inflation will slow back towards their target despite the lack of progress at the start of this year. We expect the Fed’s updated projections to show an upward revision to the inflation outlook for this year but not sufficient to prevent the Fed from continuing to signal that they plan to deliver multiple rate cuts in the 2H of this year. We expect the USD to weaken further if the Fed’s updated DOT plot reveals that the median forecast for the Fed funds rate at the end of this year has been raised by just 25bps to indicate plans to deliver 50bps of cuts this year. To trigger a bigger reversal of the recent USD weakening trend, the US CPI report for May and/or FOMC meeting would have to seriously cast doubt on whether the Fed will cut rates at all this year.
CHINA BEV EXPORTS BY REGION
Source: Atlantic Council (29th Feb 2024)
EU MOST EXPORTED GOODS TO CHINA, EUR BILLIONS
Source: Eurostat
Weekly Calendar
|
Ccy |
Date |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
JPY |
06/10/2024 |
00:50 |
GDP SA QoQ |
1Q F |
-0.5% |
-0.5% |
!! |
|
JPY |
06/10/2024 |
00:50 |
BoP Current Account Adjusted |
Apr |
¥2098.8b |
¥2010.6b |
!! |
|
NOK |
06/10/2024 |
07:00 |
CPI YoY |
May |
-- |
3.6% |
!!! |
|
SEK |
06/10/2024 |
07:00 |
GDP Indicator SA MoM |
Apr |
-- |
-0.3% |
!! |
|
EUR |
06/10/2024 |
09:30 |
Sentix Investor Confidence |
Jun |
-- |
- 3.6 |
!! |
|
GBP |
06/11/2024 |
07:00 |
Average Weekly Earnings 3M/YoY |
Apr |
-- |
5.7% |
!!! |
|
GBP |
06/11/2024 |
07:00 |
Employment Change 3M/3M |
Apr |
-- |
-178k |
!! |
|
EUR |
06/11/2024 |
08:10 |
ECB's Villeroy speaks in Paris |
!! |
|||
|
USD |
06/11/2024 |
11:00 |
NFIB Small Business Optimism |
May |
-- |
89.7 |
!! |
|
EUR |
06/11/2024 |
12:05 |
ECB's Lane Speaks |
!!! |
|||
|
CNY |
06/12/2024 |
02:30 |
CPI YoY |
May |
0.4% |
0.3% |
!! |
|
EUR |
06/12/2024 |
07:00 |
Germany CPI YoY |
May F |
-- |
2.4% |
!!! |
|
GBP |
06/12/2024 |
07:00 |
Monthly GDP (MoM) |
Apr |
-- |
0.4% |
!!! |
|
GBP |
06/12/2024 |
07:00 |
Trade Balance GBP/Mn |
Apr |
-- |
-£1098m |
!! |
|
USD |
06/12/2024 |
13:30 |
CPI Ex Food and Energy MoM |
May |
0.3% |
0.3% |
!!! |
|
USD |
06/12/2024 |
19:00 |
FOMC Rate Decision (Upper Bound) |
5.50% |
5.50% |
!!! |
|
|
USD |
06/12/2024 |
19:30 |
Fed Chair Powell holds press conference |
!!! |
|||
|
GBP |
06/13/2024 |
00:01 |
RICS House Price Balance |
May |
-- |
-0.05 |
!! |
|
AUD |
06/13/2024 |
02:30 |
Employment Change |
May |
20.0k |
38.5k |
!!! |
|
EUR |
06/13/2024 |
10:00 |
Industrial Production SA MoM |
Apr |
-- |
0.6% |
!! |
|
USD |
06/13/2024 |
13:30 |
Initial Jobless Claims |
-- |
-- |
!! |
|
|
USD |
06/13/2024 |
13:30 |
PPI Final Demand MoM |
May |
0.1% |
0.5% |
!!! |
|
JPY |
06/14/2024 |
Tbc |
BOJ Target Rate (Upper Bound) |
0.10% |
0.10% |
!!! |
|
|
JPY |
06/14/2024 |
05:30 |
Industrial Production MoM |
Apr F |
-- |
-0.1% |
!! |
|
SEK |
06/14/2024 |
07:00 |
CPI YoY |
May |
-- |
3.9% |
!!! |
|
EUR |
06/14/2024 |
07:45 |
France CPI YoY |
May F |
-- |
2.2% |
!!! |
|
EUR |
06/14/2024 |
10:00 |
Trade Balance SA |
Apr |
-- |
17.3b |
!! |
|
EUR |
06/14/2024 |
10:00 |
ECB's Lane Speaks |
!!! |
|||
|
USD |
06/14/2024 |
13:30 |
Import Price Index YoY |
May |
-- |
1.1% |
!! |
|
USD |
06/14/2024 |
15:00 |
U. of Mich. Sentiment |
Jun P |
73.0 |
69.1 |
!! |
|
EUR |
06/14/2024 |
18:30 |
ECB's Lagarde Speaks |
!!! |
Source: Bloomberg, Macrobond & MUFG GMR
Key Events:
- The week ahead will important of the FX market and USD performance. The Fed holds its latest FOMC meeting (Wed) and the latest US CPI (Wed) and PPI (Thurs) reports for May will be released. With the Fed no closer to cutting rates in the week ahead, the main focus will be the Fed’s updated policy guidance. The updated economic projections are likely to reveal an upward revision to the inflation forecasts for this year to reflect the recent lack of progress towards achieving the 2.0% inflation target. As a result, we expect the Fed to signal that they are planning to keep rates on hold for longer and deliver less rate cuts this year. On balance, we believe it is more likely that the updated DOT plot will show the median projection for the number of Fed rate cuts this year falling to 2 from 3 projected back in March although the risk of a larger downward revision to just one cut can’t be ruled out. We expect Fed Chair Powell to still sound relatively dovish by indicating that they remain confident inflation will continue to slow. The latest US CPI report for May will be released just ahead of next week’s FOMC meeting. It is expected to reveal further evidence that the pick-up in core inflation at the start of this year was temporary and not the start of a re-accelerating trend.
- The BoJ’s upcoming policy meeting will be watched closely for any signal that they are planning to speed up the pace of monetary tightening. We expect the BoJ to signal that they plan to slow down the pace of monthly JGB purchases from the recent pace of around JPY6 trillion per month. It has been reported this week that the pace could slow to around JPY5 trillion although we expect a more flexible approach from the BoJ rather than setting another specific target. At the same time, we expect the BoJ hike rates again at the following meeting in July so will be watching for any signal that they are moving closer to hiking rates such as displaying more confidence in the inflation outlook and potentially expressing unease over inflation impact from a weaker yen.