FX Weekly

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Stronger USD heading into central bank updates

FX View:

It has been a volatile week for the USD. After correcting lower at the start of the week in response to pushback against domestic currency weakness from policymakers in China and Japan. The USD quickly regained upward momentum with the dollar index on course to close higher for the ninth consecutive week and threatening to break out of the top of the year to date range. The week ahead will be dominated by central bank updates from the Fed, BoE, and BoJ. We expect the BoE to deliver another rate hike but provide less hawkish guidance over the need for further hikes like the ECB that could weigh on the GBP. In contrast we expect the Fed and BoJ to leave policy unchanged next week. The JPY is likely to weaken further if Governor Ueda does not push back as strongly by talking up the possibility of an earlier hike. The main downside risk for the USD would be if the Fed scraps plans for one more hike. But any correction should again prove short-lived.

G10 COMMODITY FX OUTPERFORM APART FROM NOK 

Source: Bloomberg, 14:35 GMT, 15th September 2023 (Weekly % Change vs. USD)

Trade Ideas:

We are recommending a new short GBP/CAD trade idea, and are maintaining our long USD/SEK trade idea.

IMM Positioning:

The latest IMM weekly positioning data covering the week to 5th September revealed that Leveraged Funds cut short USD positions for the second consecutive week. The biggest short USD positions are held against the GBP, MXN, and EUR. Those positions were partly offset by the long USD positions held against the JPY and ZAR.

Sentiment Analysis on ECB Monetary Policy Statements:

Our analysis on the recent ECB Monetary Policy Statement identifies an aspirational ECB shifting away from the well-known hawkish narrative to a data dependent higher-for-longer approach. We also highlight the drastic fall in key terms extracted from the recent statement is an indication the ECB means to send a clear message to the market

FX Views

USD maintains upward momentum despite running into more resistance

It has been an eventful week for the USD. At the start of the week it corrected lower resulting in the dollar index falling to an intra-day low of 104.42 on Monday triggered by pushback against domestic currency weakness from policymakers in China and Japan. However, the sell-off has proven to be short-lived as the USD has regained upward momentum at the end of the week. It leaves the dollar index on track for the ninth consecutive week of gains as it attempts to break above the 105.00-level on a sustained basis.        

There will be more market attention on the BoJ’s upcoming policy meeting in the week ahead after comments from Governor Ueda at the start of this week. Governor Ueda told the Yomiuri newspaper that it’s possible that they will have enough information and data by year end to judge if wages will continue to rise which is a condition for tightening monetary policy. He also added that if the BoJ becomes confident that prices and wages will keep going up sustainably, ending its negative interest rate is among the options available. Our initial view was that the comments were intended to offer more support for the yen in the near-term and to deter further speculative selling of the yen. The Japanese government had already signalled that it was becoming increasingly concerned by yen weakness when it raised the intervention threat to the highest level (click here). However, a subsequent Bloomberg report released today has attempted to downplay the importance of Governor Ueda’s comments ahead of next week’s BoJ policy meeting. The Bloomberg report states that there is a discrepancy between the market participants’ interpretation of Governor Kuroda’s comments and BoJ officials’ interpretation who see little change in view. It has resulted in USD/JPY rising back up to the 148.00-level. Without stronger pushback from Governor Ueda at next week’s BoJ meeting, USD/JPY will move closer to the 150.00-level and it will put more pressure on the government to intervene to support the JPY.            

At the same time, policymakers in China have pushed back more strongly against CNY weakness after USD/CNY hit a high of 7.3503 on 8^th September. In a strongly worded statement, the PBoC warned those speculating in anticipation of a weaker CNY that “we are capable and feel confident…in keeping the renminbi exchange rate at a reasonably stable level. We will act when we act, resolutely correcting one-sided appreciation.” With the China officially holding FX reserves of just over USD3 trillion,  

USD IS TESTING TOP OF YTD TRADING RANGE

Source: Bloomberg, Macrobond & MUFG GMR

CNY & JPY HAVE BEEN CLOSELY LINKED THIS YEAR

Source: Bloomberg, Macrobond & MUFG GMR

and the state banks reportedly having a USD1 trillion balance sheet, policymakers have the firepower to support the renminbi if they desire. The measures have proven successful at least initially in bringing down USD/CNY back below the 7.3000-level where it has been consolidating this week. Negative investor sentiment towards China’s economy has also improved at the end of this week following the release of the stronger monthly activity data for August. It was revealed that retail sales and industrial production growth both picked up in August indicating that policy stimulus is beginning to have a supportive impact for China’s economy. However, weakness continued in the housing sector where it is still too early to see the impact of recent measures implemented to boost housing demand. The PBoC is continuing to lower rates with a 25bps cut for the reserve requirement ratio. Widening yield spreads in favour of a higher USD/CNY will continue to make it challenging for Chinese policymakers to prevent the CNY from weakening further without a continued improvement in investor sentiment towards China’s economy.

Alongside the BoJ’s policy update, the other major central banks of the Fed and BoE will be holding their latest policy meetings in the week ahead. Market participants will be watching closely to see if they deliver a similar message to the ECB (click here) this week by signalling that rates are close to a peak. The EUR has continued to weaken this week hitting a fresh low of 1.0632 in response to the stronger signal that rates are closer to a peak, and to the significant downgrade to the euro-zone GDP forecasts that helped to lower inflation forecasts at the end of the forecast period. Recent comments from BoE Governor Bailey and Chief Economist Pill have signalled that the BoE could update their forward guidance to indicate a stronger preference to keep rates on hold after lifting the policy rate further by 25bps to 5.50% next week. Cable is currently poised at support from the 200-day moving average at around 1.2430 which if broken would open the door to the sell-off extending into the low 1.2000’s. In contrast, the Fed is expected to leave rates on hold next week. Market attention will mainly focus on the Fed’s updated economic projections and forward guidance. We expect the updated projections to include a significant upward revision to the US GDP forecast for this year while the core inflation forecast will be lowered. The main downside risk for the USD would be if the median projection for one last hike this year is removed, and Chair Powell signals that the rate hike cycle has reached an end.             

In these circumstances, we still believe that upward momentum continues to favour further USD upside in the near-term while the US economy is outperforming. The GBP should prove the most sensitive to a dovish policy surprise in the week ahead from the latest central bank policy updates.

CHINA ACTIVITY DATA PROVIDES SOME RELIEF

Source: Bloomberg, Macrobond & MUFG GMR

YIELD SPREADS MOVING AGAINST GBP AHEAD OF BOE 

Source: Bloomberg, Macrobond & MUFG GMR

Weekly Calendar

Ccy	Date	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
AUD	09/19/2023	02:30	RBA Minutes of Sept. Policy Meeting				!!
EUR	09/19/2023	10:00	CPI YoY	Aug F	5.3%	5.3%	!!!
USD	09/19/2023	13:30	Housing Starts	Aug	1440k	1452k	!!
CAD	09/19/2023	13:30	CPI YoY	Aug	--	3.3%	!!!
JPY	09/20/2023	00:50	Trade Balance	Aug	-¥661.0b	-¥78.7b	!!
EUR	09/20/2023	07:00	Germany PPI YoY	Aug	--	-6.0%	!!
SEK	09/20/2023	07:00	Unemployment Rate SA	Aug	--	7.0%	!!
GBP	09/20/2023	07:00	CPI YoY	Aug	--	6.8%	!!!
CAD	09/20/2023	18:30	BoC Releases Summary of Deliberations				!!
USD	09/20/2023	19:00	FOMC Rate Decision (Upper Bound)		5.50%	5.50%	!!!
USD	09/20/2023	19:30	Fed Chair Powell Press Conference				!!!
NZD	09/20/2023	23:45	GDP SA QoQ	2Q	0.4%	-0.1%	!!!
GBP	09/21/2023	07:00	Public Sector Net Borrowing	Aug	--	3.5b	!!
CHF	09/21/2023	08:30	SNB Policy Rate		2.00%	1.75%	!!!
SEK	09/21/2023	08:30	Riksbank Policy Rate		4.00%	3.75%	!!!
NOK	09/21/2023	09:00	Deposit Rates		4.25%	4.00%	!!!
CHF	09/21/2023	09:00	SNB Press Conference				!!
GBP	09/21/2023	12:00	Bank of England Bank Rate		5.50%	5.25%	!!!
USD	09/21/2023	13:30	Current Account Balance	2Q	--	-$219.3b	!!
USD	09/21/2023	13:30	Initial Jobless Claims		--	--	!!
EUR	09/21/2023	23:45	ECB's Lane Speaks				!!!
JPY	09/22/2023	00:30	Natl CPI YoY	Aug	3.0%	3.3%	!!!
JPY	09/22/2023	Tbc	BOJ 10-Yr Yield Target		0.00%	0.00%	!!!
GBP	09/22/2023	07:00	Retail Sales Inc Auto Fuel MoM	Aug	--	-1.2%	!!
EUR	09/22/2023	09:00	HCOB Eurozone Manufacturing PMI	Sep P	--	43.5	!!
EUR	09/22/2023	09:00	HCOB Eurozone Services PMI	Sep P	--	47.9	!!
GBP	09/22/2023	09:30	S&P Global/CIPS UK Manufacturing PMI	Sep P	--	43.0	!!
GBP	09/22/2023	09:30	S&P Global/CIPS UK Services PMI	Sep P	--	49.5	!!
CAD	09/22/2023	13:30	Retail Sales MoM	Jul	--	0.1%	!!
USD	09/22/2023	14:45	S&P Global US Services PMI	Sep P	--	50.5	!!

 Source: Bloomberg, Macrobond & MUFG GMR

Key Events:

 

• It is an important week for central bank policy updates. The Fed (Wed), SNB (Thurs), Riksbank (Thurs), Norges Bank (Thurs), BoE (Thurs) and BoJ (Fri) are all scheduled to hold their latest policy meetings in the week ahead. The main event will be the Fed’s latest policy update. We expect the Fed to leave rates on hold next week which is currently judged as a done deal. More important for market participants will be the Fed’s updated policy guidance included the economic & policy rate projections. Will the updated projections continue to signal that the Fed is planning one final rate hike later this year? What is more certain is that the economic growth projection for the year will be raised from 1.0% set back in June.      

 

• In contrast, we expect the SNB, Riksbank, Norges Bank, and BoE to all deliver further 25bps hikes although the updated guidance should signal more confidence that their hiking cycles are getting closer to the end. Before the BoE holds their policy meeting next week, the latest UK CPI report will be released on Wednesday. Recent comments from Governor Bailey and Chief Economist Pill have dampened expectations for further hikes beyond next week.

 

• The BoJ’s latest policy update will also attract more attention following comments at the start of this week from Governor Ueda who indicated that the BoJ could be in a position towards the end of this year to more seriously consider raising interest rates. Market participants will be listening closely to see if he provides further insight into the potential timing of rate hikes and signals more concern over yen weakness.