USD/JPY moving back towards pre-intervention levels

JPY: US Treasury report in focus amidst renewed yen weakness

The yen has continued to weaken during the Asian trading session resulting in USD/JPY rising back above the 159.00-level as it moves back closer to the year to date high from 29^th April at 160.17. The price action highlights that the impact of intervention by Japan to support the yen from in late April/early May has almost fully reversed. The yen has resumed its weakening trend even as yield spreads have been moving in its favour in recent months. The 2-year yield spread between US and Japanese government bonds peaked at around 4.75% in April and has since narrowed by around 30bps. The recent narrowing of yield spreads between Japan and the US is clearly not sufficient to reverse the yen weakening trend with yield spreads still at their widest levels since the late 1990’s/early 2000’s. The re-weakening of the yen will increase pressure both on: i) the MoF to intervene again to support the yen if USD/JPY breaks above the 160.00-level and the speed of the yen sell-off accelerates, and ii) on the BoJ to speed up the pace of policy normalization. It supports our forecast for the BoJ to raise rates again by 15bps at next month’s policy meeting alongside details plans to slow the pace of JGB purchases over the next couple of years.

The US Treasury released their semi-annual report to Congress overnight on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the US. In the report, the US Treasury added Japan to its  monitoring list for foreign exchange practices but stopped short of labelling Japan or any other trade partner as a currency manipulator. The monitoring list also includes China, Taiwan, Malaysia, Singapore, Vietnam and Germany. In the section relating to Japan, the US Treasury added that its “expectation is that in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations”. The US Treasury noted that Japan is transparent with respect to foreign exchange operations, regularly publishing its foreign exchange intervention each month. The US Treasury also noted that the yen has fallen to a fifty year low on a real effective basis which they stated was consistent with wide interest rate differentials between Japan and the US resulting from their divergent monetary policies. The comments do not suggest to us that there is now greater opposition from the US against further intervention from Japan to support the yen. As we saw ahead of the last bout of intervention, Japan appeared to get the greenlight prior to intervention from the US, although market participants may question how quickly Japan will wait before intervening again if the yen only weakens slowly after breaking back above 160.00.            

The tight correlation between the performance of USD/JPY and USD/CNY has remained in place this week with both the yen and renminbi weakening. USD/CNY has hit a fresh year to date high overnight of 7.2613 as it continues to move back towards last year’s highs between 7.3000 and 7.3500. The gradual adjustment higher for USD/CNY has been encouraged by the PBoC setting higher daily fixes. Yesterday’s daily fix attracted more market attention as it was raised from 7.1159 to 7.1192 which was the largest daily increase since 16^th April. It has encouraged market speculation that Chinese policymakers will continue to allow a weaker currency through the rest of this year heading into the US election when rising trade tensions between the US and China are expected to attract even more market attention. In yesterday report, the US Treasury left China on their monitoring list reflecting their failure to publish foreign exchange intervention and a broader lack of transparency around key features of tis exchange rate mechanism, as well as its outsized trade imbalance with the US. Overall, the developments point to further Asian currency weakness in the near-term.

USD/JPY IS DIVERGING FROM YIELD SPREADS

Source: Bloomberg & Macrobond

CHF: SNB acts with inflation projections lowered

We mentioned here yesterday that the strength of the franc in recent weeks could be enough to swing the SNB in favour of cutting rates and that’s what unfolded yesterday with the SNB’s forecasts on inflation indicating to us the potential for investors viewing the SNB has possibly falling behind the curve and reverting back to the pre-covid focus of fighting disinflation/deflation risks and the knock-on consequence of an excessively strong currency.  

Like in March, the SNB cut rates and the decision was coupled with updated forecasts that were lower than the previous set of forecasts. Is the SNB over-estimating the inflation risks? The updated forecasts yesterday now show the annual inflation rate falling to just 1.1% by Q2 2025, five quarters earlier than when that level was assumed to be hit in the March forecasts. By Q1 2027, the SNB forecasts inflation at 1.0%. For a small open economy like Switzerland’s FX moves can be important and the recent strength likely played a role in the lowering of the forecasts.

In the introductory statement, the SNB President Jordan mentioned the strength of the franc as being driven by the “political uncertainties in Europe”. He went to state that the SNB would “use our monetary policy measures to ensure that inflation remains within the range consistent with price stability” and that the SNB was willing to be “active in the foreign exchange market as necessary”.

So within the space of months we are now back in a position of the SNB warning more about inflation risks to the downside. While not explicit in the above comments, the comments were made in the context of the recent strength of the franc and hence imply franc selling to ensure inflation does not fall further.

Certainly, in a scenario of RN winning an outright majority in the snap elections, EUR is likely to fall more sharply and that will likely be as pronounced and possibly more pronounced against the franc than against the dollar. It would likely be a scenario in which the SNB would intervene to sell francs and limit appreciation. Certainly, with that possible risk on the horizon it is very unlikely that this SNB rate cut will have much sustainable impact on the direction of the franc. If the political risk passes it would allow for a bigger bounce but the 0.4% gain in EUR/CHF yesterday does in our view illustrate the limited impact a rate cut will have in circumstances of elevated political risks in the euro-zone.  

EUR/CHF DROP ALL ABOUT POLITICS NOT RATES

Source: Bloomberg & Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:00	German Buba President Nagel Speaks	--	--	--	!!
FR	08:15	French Manufacturing PMI	Jun	46.8	46.4	!!
FR	08:15	French S&P Global Composite PMI	Jun	49.5	48.9	!
FR	08:15	French Services PMI	Jun	50.0	49.3	!!
GE	08:30	German Composite PMI	Jun	52.7	52.4	!
GE	08:30	German Manufacturing PMI	Jun	46.4	45.4	!!
GE	08:30	German Services PMI	Jun	54.4	54.2	!!
EC	09:00	Manufacturing PMI	Jun	48.0	47.3	!!
EC	09:00	S&P Global Composite PMI	Jun	52.5	52.2	!!
EC	09:00	Services PMI	Jun	53.5	53.2	!!
UK	09:30	Composite PMI	--	53.1	53.0	!!!
UK	09:30	Manufacturing PMI	--	51.3	51.2	!!!
UK	09:30	Services PMI	--	53.0	52.9	!!!
CA	13:30	Core Retail Sales (MoM)	Apr	0.5%	-0.6%	!!
CA	13:30	IPPI (MoM)	May	0.5%	1.5%	!
CA	13:30	IPPI (YoY)	May	--	1.4%	!
CA	13:30	Retail Sales (MoM)	Apr	0.7%	-0.2%	!!
CA	13:30	RMPI (YoY)	May	--	3.1%	!
CA	13:30	RMPI (MoM)	May	--	5.5%	!!
US	14:45	Manufacturing PMI	Jun	51.0	51.3	!!!
US	14:45	S&P Global Composite PMI	Jun	--	54.5	!!
US	14:45	Services PMI	Jun	53.7	54.8	!!!
US	15:00	Existing Home Sales (MoM)	May	--	-1.9%	!!
US	15:00	Existing Home Sales	May	4.08M	4.14M	!!!
US	15:00	US Leading Index (MoM)	May	-0.3%	-0.6%	!!
US	16:00	Fed Monetary Policy Report	--	--	--	!!!

Source: Bloomberg