Growth Gap Backs Dollar

June 24, 2024

Elias Haddad

Growth Gap Backs Dollar

The June Composite PMIs showed the US economy gaining growth traction relative to other major economies.

USD/JPY traded near its April highs, sparking verbal warning by Japan Vice Finance Minister Masato Kanda.

There are no policy-relevant economic data releases today.

Please see our Drivers for the Week Ahead for an in-depth look at what markets are facing this week.

USD is consolidating near its highest level since May 1. Growth momentum favours the US economy and the cyclical USD uptrend. In June, the US composite PMI improved to a 26-month high at 54.6, the Eurozone’s fell to a 3-month low at 50.8, the UK’s dropped to a 7-month low at 51.7, and Japan’s fell to a six-month low at 50.0.

The June Dallas Fed manufacturing survey is up next and is expected to rise to -15.0 from -19.4 in May (3:30pm London). Otherwise, there are no policy-relevant economic data releases today. This week’s US data highlight is the May Personal Income and Outlays report Friday. In the Eurozone, the ECB’s May consumer inflation expectations survey is the focus Friday. Thursday, the Riksbank is widely expected to stay on hold. Tuesday, Canada releases its May CPI report and Wednesday it’s Australia’s turn.

Fed speakers today include: Fed Governor Christopher Waller (8:00am London), Chicago Fed President Austan Goolsbee (1:30pm London), and San Francisco Fed President Mary Daly (7:00pm London).

USD/JPY traded just under its April 29 pre-intervention high of 160.17 during the Asia overnight session. JPY weakness prompt Japan’s top currency official Masato Kanda to remind market participants 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, the speed, rather than the level, of JPY depreciation matters more for the ministry of finance. Kanda specified previously 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 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 in part because the BOJ is unlikely to raise the policy rate by more than is currently priced-in (30bps over the next 12 months). Japan 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.

The BOJ June 13-14 policy meeting Summary of Opinions showed there is not much appetite from BOJ officials to crank up tightening in response to a depreciation in the yen. One member warned monetary policy “is not determined by short-term developments in foreign exchange rates”. 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.”

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