Intervention risk back in focus as USD/JPY approaches 160.00-level

JPY: Stepping up verbal intervention as April high comes back into sight

It has been a relatively quiet start to the week in the foreign exchange market with the major pairs largely unchanged. USD/JPY has been trading just below the 160.00-level as the yen continues to reverse all of the gains following intervention from Japan in late April/early May. With USD/JPY moving back to within touching distance of the year to date high from 29^th April at 160.17, the yen sell-off has prompted a step up in verbal intervention overnight from Japanese officials. Japan’s top currency official Masato Kanda warned that Japan is ready to intervene in the foreign exchange market “24 hours a day” if needed. He noted that they are not thinking of specific levels for intervention, but would take proper steps if FX moves were deemed as excessive. He also added that Japan is in touch with global peers on FX on a daily basis. The pace of yen selling has accelerated over the last couple of trading days but it is not clear that the price action would currently be deemed as “excessive” to warrant intervention from Japan. At best the comments from Vice Finance Minister Kanda may help to temporarily slow the yen sell-off as USD/JPY approaches the year to date high. Those comments have since been quickly backed up by Finance Minister Suzuki who reiterated that it is desirable that FX moves stably and reflects fundamentals. He warned that Japan will take an appropriate response if necessary and is watching FX moves closely.

The yen has continued to weaken after the BoJ’s last policy meeting at which it disappointed market expectations by delaying the announcement of finalized plans to slow the pace of JGB purchases until their next policy meeting in July. The slow pace of BoJ policy normalization continues to weigh heavily on the yen. The minutes form the June policy meeting were released overnight. The minutes revealed that board members discussed the case for a delivering another rate hike as upside risks to inflation become “more noticeable”. One members noted that “it is necessary for the bank to continue to closely monitor relevant data in preparation for the next policy meeting”.  “If deemed appropriate, the bank should raise the policy rate before its too late”. The minutes alongside the ongoing sell-off for the yen give us more confidence that the BoJ will hike rates further by 15bps at the July policy meeting although it is unlikely to be sufficient on its own to trigger a reversal of current yen weakening trend. The minutes also revealed that one member said “it is better not to decide on a specific plan  at this policy meeting but to collect views from market participants before making a decision, as that might allow the bank to conduct a bigger reduction in its purchase amount of JGBs. BoJ officials have indicated that the slowdown in JGB purchases will be considerable.

JPY SHORTS REMAIN ELEVATED

Source: Bloomberg, Macrobond & MUFG GMR

USD: Negative developments overseas provide offset to softer US inflation

The USD has continued to rebound over the past week helping to lift the dollar index back up towards the 106.00-level where it struggled to sustain levels above in the 2H of April. The dollar index closed higher for the third consecutive week this month. The breakdown of the weekly performance reveals a more mixed performance against G10 currencies. The high beta G10 commodity currencies of the NOK, AUD, and CAD all  strengthened against the USD last week. While the other major currencies of the JPY, GBP, CHF and EUR weakened against the USD. The price action is more consistent with risk-on trading conditions. MSCI’s ACWI global equity index has hit fresh record highs at the end of this week while bond yields in developed markets have continued to correct lower after peaking at the end of April. It reflects building investor optimism over a softer landing for the global economy triggered by the recent run of softer US inflation prints. The release in the week ahead of the latest US PCE report is expected to provide confirmation that the core deflator increased by only +0.1%M/M in May which alongside leading indicators pointing towards a further softening of US labour demand is encouraging US rate market participants to price back in multiple Fed rate cuts in the 2H of this year.              

The USD rebound has been mainly driven by negative developments outside of the US. Heightened political risks in France have weighed modestly on the performance on European currencies in recent weeks in including the EUR and the Central European currencies of the CZK, HUF and PLN. It reflects in part a sharp repricing of French government bonds in response to fears that the outcome from the French elections will lead to further fiscal slippage. Last week the European Commission warned France and Italy over their public finances by placing them in the Excessive Deficit Procedure. France’s budget deceit totalled 5.5% of GDP last year and is expected to narrow only marginally to 5.3% of GDP this year which is well above the EU deficit limit of 3% of GDP. Talks between Paris and the Commission will take place in the coming months in order to reach an agreement on required fiscal consolidation plans. Market participants are wary that plans to implement even a slow pace of tightening over say a seven year period could prove more difficult in implement after the upcoming elections. It has already resulted in the yield spread between 10-year French and German government bonds widening out to the highest levels since the euro-zone debt crisis back between 2011 and 2012. In contrast, the negative impact on the EUR has been more modest so far. EUR/USD has weakened by around 2% and EUR/GBP by around 0.8%. We continue to see room for EUR/USD to continue adjusting lower towards the bottom of the current 1.0500 to 1.1000 trading range ahead of the French elections in anticipation of a hung parliament. While we do not expect the negative political developments to derail the tentative economic recovery in the euro-zone, the release on Friday of the softer PMI surveys for June will create some near-term doubts. The euro-zone composite PMI averaged 51.6 in Q2 which is consistent with growth of around 0.2%Q/Q following growth of 0.3%Q/Q in Q1. 

The other negative developments outside of the US that are encouraging a rebound for the USD are taking place in Asia. As we highlighted above the JPY is continuing to weaken resulting in USD/JPY rising back closer to the year to date high from 29th 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 tight correlation between the performance of USD/JPY and USD/CNY has remained in place over the past week with both the JPY and CNY weakening. USD/CNY has hit a fresh year to date high overnight of 7.2618 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. The daily fix attracted more market attention last week when it was it was raised from 7.1159 to 7.1192 on 2th June which was the largest daily increase since 16th April. It has encouraged more market speculation that Chinese policymakers will continue to allow a weaker CNY 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. Overall, the developments point to further Asian currency weakness against the USD in the near-term. Please see our latest FX Weekly (click here) for more details.             

EURO-ZONE ECONOMY IS STILL RECOVERING DESPITE SETBACK IN JUNE

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Ifo Business Climate Index	Jun	89.4	89.3	!!
UK	11:00	CBI Industrial Trends Orders	Jun	-26	-33	!!
EC	11:00	Eurogroup Meetings	--	--	--	!!
GE	11:10	German Buba President Nagel Speaks	--	--	--	!!
US	15:30	Dallas Fed Mfg Business Index	Jun	--	-19.4	!
EC	16:30	ECB's Schnabel Speaks	--	--	--	!!
CA	18:45	BoC Gov Macklem Speaks	--	--	--	!!
US	19:00	FOMC Member Daly Speaks	--	--	--	!!

 

Source: Bloomberg