Clash of Titans

June 27, 2024

Clash of Titans

  • Second-tier US economic data are due today. Biden-Trump clash takes the spotlight.
  • Riksbank is widely expected to leave the policy rate at 3.75%.
  • Central bank policy rate decisions are due today in the Philippines, Czech Republic, Turkey, and Mexico. Please see our EM Preview for the Week for all the details.

USD is correcting lower after rising to a seven-week high yesterday. Second-tier US economic data are due today. The final Q1 GDP print is expected to be revised up a tick to 1.4% SAAR (1:30pm London). Looking forward, the Atlanta Fed GDPNow model is currently tracking Q2 growth at 3.0% SAAR and will be updated today after the May durable goods orders data.

In our view, the favourable US macro backdrop and easy financial market conditions justify a reassessment in Fed funds rate expectations in support of a higher USD. Fed funds futures price-in 44 bp of cuts by December 2024 while the Fed has only 25 bp of cut pencilled-in.

The first debate between President Biden and former President Trump takes place today (9:00pm New York, 2:00am Friday in London). With a little more than four months before the November 5 election, polls continue to point to a tight race. However, the betting markets continue to price in a Trump win.

SEK is consolidating ahead of today’s Riksbank policy announcement (8:30am London). The Riksbank is widely expected to leave the policy rate at 3.75%. After cutting the policy rate 25 bp in May, the Riksbank noted that “the policy rate could be cut two more times during the second half of the year, in line with the March forecast.” New sets of forecasts will be published today in the June Monetary Policy Report. In the meantime, the swaps market has more than fully priced-in 50 bp of easing by year-end. Bottom line: monetary policy divergence between Riksbank and Norges Bank suggests NOK/SEK can edge higher. The Norges Bank is in no rush to start easing.

EUR/USD retraced some of yesterday’s losses. Nonetheless, French political uncertainty and ECB/Fed policy divergence will continue to undermine EUR/USD. Today’s focus is on the Eurozone money supply data (9:00am London) and June economic confidence indicators (10:00am London). Broad monetary growth (M3) is expected to rise to a 13-month high at 1.5% y/y vs. 1.3% in April. Overall, credit dynamics are improving but remain very weak by historical standards.

USD/JPY edged down near 160.30 after hitting a fresh multi-decade high around 160.87 overnight. Unsurprisingly, Japan Finance Minister Shunichi Suzuki warned in response to yesterday’s USD/JPY surge that “sudden, one-sided moves are not desirable”.

There is no specific level for BOJ/MOF intervention. It’s the speed, rather than the level, of JPY depreciation that matters more for the ministry of finance. In fact, Vice Finance Minister Kanda previously specified he considers 10 yen moves against the dollar over the course of a month as rapid. USD/JPY is up over 6 yen since its June 4 lows at 154.55. This suggests the intervention zone is between 160.00-165.00.

Regardless, intervention will slow rather than reverse the uptrend in USD/JPY. First, the BOJ is unlikely to raise the policy rate by more than is currently priced-in (35bps over the next 12 months) because Japan underlying inflation is in a firm downtrend. Annual core CPI (ex-fresh food & energy) slowed to 2.1% in May, the lowest rate since September 2022 and near the BOJ’s 2% price stability target. Second, the cyclical USD uptrend is intact as the Fed is in no rush to loosen policy and the US economy is gaining growth traction relative to other major economies.

As a background, the BOJ spent a record ¥9.8 trillion on intervention most likely on April 29 and May 1 to curtail USD/JPY strength. The result was a brief USD/JPY undershoot from a high of 160.17 on 29 April to a low of 151.86 on May 3. USD/JPY has rallied since the May low, underscoring the case that until the BOJ outlines a more hawkish tightening cycle JPY is likely to remain weak.

NZD/USD bounced off its 200-day moving average at 0.6070. New Zealand June ANZ consumer and business surveys point to weak economic activity but easing inflation pressures. This reinforces the case for the RBNZ to start easing earlier than they project which can further weigh on NZD. The RBNZ has a first policy rate cut penciled-in for Q3 2025. In contrast, the swaps market has a November cut fully priced in.

New Zealand consumer confidence dipped 2% m/m to 83.2 in June and remains well below the 20-year average of 114.0. Meanwhile, business Own Activity Outlook index stabilized near a 10-month low around 12 in June and inflation indicators improved. Cost Expectations, Pricing Intensions, and Inflation Expectations indexes all edged lower to multi-year lows in June.

AUD continues to firm against most major currencies on RBA rate hike expectations. The swaps market is pricing over 60% odds of a 25 bp RBA policy rate increase between August and September following yesterday’s hot Australia CPI print. The rise in Australia consumer inflation expectation over the next 12 month to 4.4% in June from 4.1% in May adds to inflation concern. Bottom line: monetary policy divergence between the RBA and BOC suggests AUD/CAD can edge higher. The bar for an RBA rate hike is low while the BOC has already started easing. RBA Deputy Governor Andrew Hauser is up next (10:30am London).

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