Lull in the Flow

July 21, 2025
6 min read
  • USD is trading on the defensive ahead of a quiet day on the data front. We expect USD to find near-term support this week, but downtrend holds. Check-out our Drivers for the Week for an in-depth look at what markets are facing this week.
  • Japan political gridlock could ease upward pressure on JGB yields.
  • New Zealand Q2 CPI reinforces the case for another RBNZ rate cut.

JAPAN

USD/JPY is trading heavy under 148.00 and JPY is outperforming most major currencies. Japan stock and bond markets are shut today for the Marine Day public holiday. Japan political gridlock means large scale stimulus or deficit spending is unlikely, which could ease upward pressure on JGB yields.

Japan’s ruling Liberal Democratic Party along with partner Komeito lost its upper house majority for the first time in 70 years, falling short by just three seats. The nationalist Sanseito party surged, winning 14 seats from the single seat it had occupied previously. With control lost in both chamber, Prime Minister Shigeru Ishiba’s government is significantly weakened and faces deeper legislative gridlock.

NEW ZEALAND

NZD underperformed most major currencies while New Zealand bonds outperformed. New Zealand Q2 CPI reinforces the case for another RBNZ rate cut. Headline CPI rose 0.5% q/q vs. 0.9% in Q1 driven by subscriptions to streaming services, electricity and vegetables prices. The CPI outcome was below the 0.6% consensus but in line with RBNZ projection. Year-over-year, headline CPI increased 2.7% (consensus: 2.8%, RBNZ: 2.6%) vs. 2.5% in Q1 while the RBNZ sectoral factor model fell 0.1pts to a four-year low at 2.8%.

The swaps market raised odds of a 25bps RBNZ rate cut at the August 20 meeting to 85% vs. 65%. Over the next 12 months, the swaps market price-in 37bps of easing and the policy rate to bottom between 2.75% and 3.00%. In our view, the RBNZ has one more cut in the pipeline. New Zealand inflation is within the target band and the policy rate is close to the RBNZ mid-point estimate of the neutral range between 2% and 4%. Bottom line: we expect NZD/USD to hold above 0.5840 (May 2025 low and 200-day moving average).

CANADA

USD/CAD is trading around the middle of multi-week 1.3550-1.3800 range. The Bank of Canada (BOC) is nearly done easing. Canada underlying inflation is sticky well above its 2% target and the June labor force survey was very strong.

However, further weakness in the BOC’s Business Outlook Survey indicator over Q2 (3:30pm London) can keep rate cut bets alive and briefly weigh on CAD. The swaps curve implies less than 10% odds of a 25bps cut at the next July 30 meeting and 75% probability of a final 25bps cut in the next 12 months.

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