- Monetary policy divergences continue to favor the dollar; regional Fed surveys will continue rolling out; Mexico reports mid-June CPI
- German IFO business climate survey for June was soft; U.K. CBI industrial trends survey was mixed in June
- BOJ released its summary of opinions; jawboning on the yen has begun again
The dollar is modestly softer as the new week begins. DXY is trading lower near 105.538 but remains on track to test the April-May highs near 106.50. The euro is trading higher near $1.0720 despite weak German IFO report (see below), while sterling is trading higher near $1.2670 despite a soft CBI industrial trends survey (see below). USD/JPY traded at a new high for this move just below 160 but has fallen back to trade near 159.45 as official jawboning resumed (see below). Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place. At the same time, weak June PMI readings for the major economies reported so far underscore the widening monetary policy divergences that should continue to support the dollar.
AMERICAS
Monetary policy divergences continue to favor the dollar. The drop in the eurozone PMI supports our view that the ECB's "hawkish cut" this month was all about growth risks. The SNB cut rates for a second time last week, while the BOE delivered a dovish hold that sets up an August cut. Meanwhile, Fed officials continue to counsel patience, with most stressing that the bank needs to see more progress on inflation before contemplating a rate cut. The market continues to see November as the most likely meeting for a cut, though there are nearly 75% odds of a cut in September. As always, it will come down to the data. Waller, Goolsbee, and Daly speak today. Even consummate dove Goolsbee has been staying on message and so the cautious messaging is likely to continue this week.
Regional Fed surveys will continue rolling out. Dallas Fed manufacturing will be reported today and is expected at -15.0 vs. -19,4 in May. Philly Fed non-manufacturing, Richmond Fed manufacturing and services, and Dallas Fed services will all be reported tomorrow. Kansas City manufacturing will be reported Thursday and Kansas City services will be reported Friday.
Mexico reports mid-June CPI. Headline is expected at 4.73% y/y vs. 4.59% previously, while core is expected at 4.18% y/y vs. 4.11% previously. If so, headline would move further above the 2-4% target range. Banco de Mexico meets Thursday and is expected to keep rates steady at 11.0%. At the last meeting May 9, the bank kept rates steady after starting the easing cycle at the March 21 meeting with a 25 bp cut. Recent weakness in MXN is an upside risk to inflation and will keep the bank cautious. The swaps curve has adjusted higher since the May meeting and is pricing in only 75 bp of easing over the next 12 months vs. 125 bp at the start of May.
EUROPE/MIDDLE EAST/AFRICA
German IFO business climate survey for June was soft. Headline came in at 88.6 vs. 89.6 expected and 89.3 in May and was the second drop in a row to the lowest since March. Expectations came in at 89.0 vs. 90.7 expected and a revised 90.3 (was 90.4) in May and current assessment came in steady at 88.3 vs. 88.5 expected. Germany’s growth outlook has improved a little bit but it’s too soon to tell if the recovery will be sustained. Indeed, the IFO report confirms the drop in Germany’s composite PMI to a two-month low of 50.6 in June. July GfK consumer confidence will be reported Wednesday and is expected at -19.5 vs. -20.9 in June.
Yet the ECB is unlikely to cut rates at the July meeting. Currently, the market sees around 5% of a cut then, but rising to over 70% in September. Most ECB officials have been pushing back against the notion even as they counsel a data-dependent approach to policy. With eurozone data weakening, we believe the hawkish cut this month was due to rising concerns about growth. Nagel, Villeroy, and Schnabel speak today.
U.K. CBI industrial trends survey was mixed in June. Total orders came in at -18 vs. -26 expected and -33 in May, while export orders came in at -39 vs. -33 in May and was the lowest since February 2021. Selling prices came in at 20 vs. 15 expected and actual in 15, which bears watching as the BOE contemplates a rate cut. The market currently sees about 66% odds of a cut in August. CBI distributive trades survey will be reported Wednesday.
ASIA
Bank of Japan released its summary of opinions. At the June meeting, the bank delivered a dovish hold and failed to deliver the anticipated reduction in its purchase amount of JGBs. One board member said “There is a possibility that prices will deviate upward from the baseline scenario if another pass-through of recent cost increases to consumer prices occurs. It is therefore necessary for the bank to consider further adjustments to monetary accommodation from the perspective of risk management.” However, another said “It is better not to decide on a specific plan at this monetary policy meeting but to collect views from market participants before making a decision, as that might allow the bank to conduct a bigger reduction in its purchase amount of JGBs.” With regards to the yen, one member warned monetary policy “is not determined by short-term developments in foreign exchange rates” while another member pointed out that “since monetary policy affects not only exchange rates but also wide aspects of people's daily lives and economic activity, it must be conducted based on the overall picture of developments in economic activity and prices.” Given its ongoing cautiousness, the market is now pricing in an even shallower tightening cycle, with the next hike coming in September and only 65 bp of hikes seen over the next three years vs. 75 bp before the meeting. This will continue to weaken the yen.
Jawboning on the yen has begun again. Top MOF currency official Kanda reminded the market that authorities are ready to intervene in the currency market “24 hours a day” if needed. Kanda added there was no specific levels for intervention. Indeed, we have always believed that the speed of deprecation, rather than any specific level, matters more for Japan policymakers. Kanda specified previously that he considers 10 yen moves against the dollar over the course of a month as rapid. USD/JPY is up a little over 5 yen since its June 4 low near 154.55. This suggests the intervention zone is between 160.00-165.00.