Dollar Firms, Yen Sinks on Reports BOJ Will Remain On Hold

July 21, 2023
  • The narrative has shifted back in the dollar’s favor, at least for now; next week will see key FOMC, ECB, and BOJ meetings that should underscore this; weekly jobless claims suggest the labor market remains robust; Canada highlight will be May retail sales data
  • The Tories did slightly better than expected in U.K. by-elections yesterday; U.K. reported firm June retail sales data; South Africa and Turkey both delivered dovish surprises yesterday
  • Reports suggest that the BOJ sees no need to tweak YCC next week; Japan reported mixed June national CPI data; another day, another stimulus announcement out of China

The dollar continues to climb. DXY is trading higher for the fourth straight day near 101.045. Key retracement levels from the July swoon come in near 101.575 (50%) and 102.045 (62%). The euro is trading lower near $1.1125 while sterling is trading lower near $1.2855 despite stronger than expected retail sales data (see below). The yen is the worst performing major today after dovish BOJ reports (see below). As a result, USD/JPY is trading at the highest since July 10 near 141.75 and a break above 142.10 sets up a test of the June 30 high near 145.05. We had been frustrated with recent dollar weakness but the relative fundamental story seems to be shifting back in favor of the greenback (see below). Cracks are widening in the rest of the world and markets seem to be finally taking note. Further dollar gains seem likely after this recent period of consolidation.


The narrative has shifted back in the dollar’s favor, at least for now. What’s noteworthy is that the relative story has changed from both sides. Developments in the eurozone, U.K., and Japan have called the hawkish central bank outlooks there into question even as strong data here in the U.S. support the hawkish Fed outlook. This has been manifested in rising 2-year interest rate differentials that are moving once again in favor the dollar.

Next week will see key FOMC, ECB, and BOJ meetings. The first two are expected to hike rates 25 bp but we expect cracks to be revealed in the ECB’s hawkish stance. Reports suggest that the BOJ will stand pat (see below) and the major reason why it and the ECB are more cautious is because of downside risks to their economies. Simply put, the U.S. economy remains much more robust and we believe markets continue to underestimate Fed tightening potential beyond next week. WIRP suggests only 35% odds of a second hike and we think those odds will rise as the data remain firm.

Indeed, weekly jobless claims suggest the labor market remains robust. Initial claims came in at 228k vs. 240k expected and 237k last week, and was the lowest since mid-May. The 4-week moving average fell to 237.5k vs. 247k last week and is the lowest since early June. These claims are for the BLS survey week containing the 12th of the month and suggest we will get another solid NFP. Consensus is at 175k but we suspect it will creep higher. Continuing claims are reported with a one-week lag and came in at 1,754k vs. 1,722k expected and a revised 1.721 mln (was 1.729 mln) last week.

Canada highlight will be May retail sales data. Headline is expected at 0.5% m/m vs. 1.1% in April, while ex-auto is expected at 0.2% m/m vs. 1.3% in April. WIRP suggests over 40% odds of a hike September 6, rising to nearly 80% October 25 and over 90% December 6. Whether there is another hike will all come down to the data. Stay tuned.


The Tories did slightly better than expected in U.K. by-elections yesterday. Three seats were expected to flip but only two did as the Tories held on to Boris Johnson’s old seat. One flipped to Labour and one flipped to go to the Liberal Democrats. A governing party had not lost three by-elections in one day since 1968 and so that record holds. Two more by-elections are expected in Tory-held seats in the coming weeks. Still, the most recent YouGov poll shows Prime Minster Sunak’s popularity at the lowest since taking power last fall. Not surprisingly, July GfK consumer confidence came in at -30 vs. -26 expected and -24 in June. It was the first drop since January and the lowest since April.

The U.K. reported firm June retail sales data. Headline came in at 0.7% m/m vs. 0.2% expected and a revised 0.1% (was 0.3%) in May while sales ex-auto fuel came in at 0.8% m/m vs. 0.2% expected and a revised flat (was 0.1%) in May. The y/y rates are both improved from May and came in higher than the expected -1.6%. We are very surprised that consumption continues hold up even as household budgets continue to get squeezed by inflation and higher interest rates. June public sector net borrowing was also reported. PSNB ex-banking groups came in at GBP18.5 bln vs. GBP22.0 bln expected and a revised GBP16.6 bln (was GBP20.0 bln) in May.

BOE tightening expectations remain subdued. WIRP suggests odds of a 50 bp hike August 3 have fallen to 45% after being largely priced in at the start of this week. Looking ahead, 25 bp hikes September 21 and November 2 are priced in but after that, the odds of one last 25 bp hike top out near 75% in February. This new expected rate path would see the bank rate peak between 5.75-6.0% vs. 6.25% at the start of this week and 6.5% at the start of last week. This is a huge downward adjustment that is taking a toll on sterling.

The South African Reserve Bank delivered a dovish surprise and left rates steady at 8.25% vs. a 25 bp hike expected. The vote was 3-2, with the dissents in favor of that hike. The bank warned of upside risks to inflation and yet it cut its headline and core inflation forecasts for 2023, 2024, and 2025 by a tick or two. We warned of a dovish surprise after the soft CPI data and we think the tightening cycle has ended. The bank's model suggests rates will be "higher for longer" as it now sees the end-2023 policy rate at 8.03% vs. 7.63% previously, the end-2024 rate at 7.41% vs. 7.16% previously, and the end-2025 rate at 7.17% vs. 6.99% previously. The swaps market sees steady rates over the next six months followed by the first cut over the subsequent six months.

Turkey central bank also delivered a dovish surprise and hiked rates 250 bp to 17.5% vs. 350 bp expected. This was the second straight dovish surprise under new Governor Erkan. The bank said it would continue its monetary tightening and that future decisions would be data-driven and predictable. Yesterday’s decision was predictably dovish but certainly was not data-driven. Otherwise, rates would be much higher. The bank also announced “quantitative tightening and selective credit tightening to support the monetary policy stance” and drain liquidity while promising gradual simplification of existing regulatory measures, which rings hollow. The swaps market is pricing in a peak policy rate near 30.75% over the next 12 months, which would not be enough to stabilize the lira.


Reports suggest that the Bank of Japan sees no need to tweak its Yield Curve Control at the upcoming July 27-28 meeting. Increased speculation of a tweak had pushed USD/JPY lower and JGB yields higher in recent weeks. The last tweak was the surprise widening of the 10-year JGB yield trading band to 0% +/- 50 bp back on December 20. Reports suggest that the BOJ’s overall assessment of the need for YCC remains largely unchanged, with the shape of the yield curve remaining smooth and market functioning not showing any signs of stress. We had always been skeptical of a move at this meeting, and instead believe it is more likely to come in the autumn. Either way, expected liftoff has been pushed into 2024 and we concur. USD/JPY is trading at the highest since July 10 and a break above 142.10 sets up a test of the June 30 high near 145.05.

Japan reported mixed June national CPI data. Headline came in a tick higher than expected at 3.3% y/y while core (ex-fresh food) came in as expected at 3.3% y/y. Both were up a tick from May. However, core ex-energy fell a tick as expected to 4.2% y/y and was the first drop since January 2022. Recent reports suggest the BOJ will likely raise its FY23 core inflation forecast above 2.0% vs. 1.8% currently whilst keeping it largely unchanged for FY24 or perhaps even nudging it lower from 2.0% currently when it releases its quarterly outlook report at the end of its policy meeting July 28.

Another day, another stimulus announcement out of China. Today, policymakers outlined measures to boost car purchases. The National Development and Reform Commission set out 10 steps to boost demand, including lower costs for electric vehicle charging and extending tax breaks for purchases. However, like other recent stimulus announcements, there were no specific figures nor indications of how they would be funded. It seems policymakers are flailing a bit right now and throwing a bunch of stuff at the wall to see what sticks. To us, the huge debt overhang is the 800 pound gorilla that must be addressed in order to get the debt-laden economy back on track. Taking on more debt is not the solution.

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