FX Update: Big stakes for USD and JPY over US CPI release.

Forex
John J. Hardy

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:

  • Brutal JPY strengthening move, USDJPY and US dollar in general face key test over US CPI release today.
  • Bank of Canada announcement: finely balanced odds for a hike, but it will be a dovish hike if we do get one.

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.

Source: Bloomberg

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.

Source: Bloomberg and Saxo Group

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.

Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)
  • 1230 – US June CPI
  • 1345 – US Fed’s Kashkari (Voter 2023) to speak
  • 1400 – Canada Bank of Canada Rate Decision
  • 1700 – US Treasury to auction 10-year notes
  • 1800 – US Fed’s Beige Book
  • 2000 – US Fed’s Mester (voter 2024) to speak
  • 2100 – New Zealand Jun. REINZ House Sales
  • 2301 – UK Jun. RICS House Price Balance
  • 0100 – Australia Jul. Consumer Inflation Expectation

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.