Chief Macro Strategist
Summary: The brutal JPY strengthening move has continued, helped along in the case of USDJPY by USDCNH weakening overnight as China’s lending data was stronger than expected. A critical test today on whether the USDJPY slide is halted in its tracks or finds further momentum over the June CPI release. The Bank of Canada meets today, with the market divided on the odds for a hike, but even if the BoC delivers a hike, there is likely little hawkishness potential in the guidance.
FX Trading focus:
USD and JPY over US CPI today: big stakes
The USDJPY correction lower has continued with solid momentum, testing well below 140.00 today. While the JPY is broadly stronger, the impact of USDJPY selling has been felt across many other USD pair as well, particularly vs European FX. Some strong lending data out of China and official praise of the Chinese tech sector offered a considerable boost to CNH overnight, helping the USD broadly lower in the Asian session. Much of the JPY strengthening has built since the Bank of Japan reported stronger than expected wage growth in May of 2.5% year-on-year and on a Bank of Japan deputy governor Uchida late last week discussing policy tweaks, if still in cautious terms. This is leading to bets that we could be set for a dramatic BoJ policy convergence with the rest of the world, possibly starting as soon as the July BoJ meeting.
That brings us to today’s CPI report from the US and whether it can aggravate and extend recent developments and this BoJ convergence story on softer than expected core inflation data or if the market is getting ahead of itself. We would need a month-on-month print for the June CPI number today that is below the 0.3% expected to really test that scenario. An in-line print will test conviction in recent developments (given the hard lean on disinflationary outlook), while a hotter than expected print could engineer a large reversal and save the US dollar for now. For USDJPY, long US yields are also critical as a coincident indicator after they recently pulled above 4.00%, only to retreat sharply.
USD technical stakes
The US dollar picture is quite mixed across G10. In the case of USDJPY, we have merely unwound the prior strengthening since early June. EURUSD, meanwhile, trades some 60 points below the high of the year just below 1.1100, while GBPUSD has broken free to the upside. AUDUSD is in a completely different place – still rangebound and even reversing back lower after an attempt to break above local resistance in the 0.6700 overnight. (GBPAUD has risen to more than three-year highs and ex-pandemic the highest level in seven years). The technical of the USD index are very clearly etched here, with the double bottom just below 100.80 from early February and mid-April now only some 0.50% from the overnight lows. Trend followers would likely pounce on a break and hold below that level.
Chart: USDJPY
In the update Monday, I focused on the positioning risks in the FX market (using US currency futures, admittedly a small sideshow relative to the total market, but solidly indicative of trend following behaviour and conviction). The JPY short has been a notable standout, but sterling, euro and Mexican peso speculative longs are also prominent, and these currencies have remained strong save for a brief wipe-out in the Mexican peso last week, so we can’t discuss a broad positioning readjustment just yet, although certainly stressed short JPY positions have no doubt helped to fuel this JPY rally. What next for USDJPY depends on the status of the Japan vs. rest-of-world policy convergence narrative as discussed above. So far, we have a very large and steep correction on our hands. The next important levels lower are the prior resistance coming in just below 138.00 and then perhaps the 137.15 area 200-day moving average, although the major 38.2% retracement of the rally off the March lows has already come into view. To the upside, a strong close today after perhaps hotter than expected core US CPI data later could put in a strong support line at today’s lows – the situation feels pivotal.
Bank of Canada preview
The Bank of Canada restarted its hiking cycle at its May meeting after a pause earlier this year to assess the impact of its tightening regime. A slim majority of observers are looking for another 25-bp nudge higher to take the policy rate to 5.00%. On the one hand, it’s worth asking why the BoC should bother to restart its tightening regime in May only to immediately pause at the very next meeting. But data out of Canada has eased the pressure on the Bank of Canada to do more, after May CPI came in softer than expected at a 3.8% “trim” core rate and the latest earnings data was surprisingly weak, as was a June Ivey PMI near 50. So of all the scenarios, I would rule out the most hawkish ones given the softer data. Even if we do get a hike, the guidance will likely be dovish to non-committal.
A side note: the Bank of Canada must have its eye on the housing market and the eventual mortgage reset ball in coming quarters, as Canadian mortgage debt is based on five-year mortgage debt, although much of that was likely refinanced in 2020-2021. Still, the higher rates have slowed new construction at a time when Canada’s immigration has picked up notably, and rents are rocketing higher on the supply shortage. One data series I found shows rents up 2.7% in just the first five months of this year. This means that the more the BoC ratchets up rates, the more rents may rise, a reflexive relationship not likely in any of the BoC’s models.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY momentum shift has been profound over the last 5 days. It is hard to take the positive trend reading seriously just yet as the prior weakening of the JPY was on such a large scale that more evidence is required to establish that we are in a JPY uptrend. Elsewhere, the sterling rally has continued, with EURGBP testing new lows for the year yesterday and GBPUSD testing new highs and NOK attracted attention yesterday on EURNOK breaking down.
Table: FX Board Trend Scoreboard for individual pairs.
Some specific developments mentioned above, but do note that EURJPY is not in a downtrend despite the negative reading now on our trending indicator, which does not expand the “window size” and can’t be aware that this large EURJPY sell-off sits atop a massive prior weakening since early April. More evidence needed there and in other JPY pairs before we can raw conclusions. Note that spot gold (XAUUSD) is sitting on the verge of a downside flip – the 1900 level critical there.
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