US
Crude oil prices extended last week’s gains as a deal to reopen the Strait of Hormuz remains elusive. We see crude oil prices driving the war narrative, with price swings likely to dictate the pace of escalation and de-escalation. That should keep Brent crude oil prices within a broad $70 to $100 range.
USD clawed back some of its post-nonfarm payroll losses, bond yields ticked up, and stocks are holding near record highs. With no US data on deck today, attention turns to Wednesday’s US July CPI print, which will set the tone for Fed funds rate expectations, Treasury yields, and USD.
NORWAY
NOK is mixed. Firmer crude is offsetting the drag to NOK from lower Norges Bank rate expectations. Norway underlying inflation undershot expectations in July. CPI-ATE was unchanged at 2.7% y/y for a second straight month, below both the 2.9% consensus and the Norges Bank’s 3.1% projection. Headline CPI was hotter at 3.0% y/y (consensus: 2.8%) vs. 2.7% in June but is still running below the Norges Bank’s 3.3% forecast.
Markets sharply pared back Norges Bank rate hike bets for Thursday’s policy decision to 6% from 25% before the CPI release. Still, we anticipate the Norges Bank to retain its guidance for another hike “at one of the forthcoming monetary policy meetings” because inflation has remained above target for several years.
JAPAN
JPY is underperforming all G10 FX and USD/JPY has retraced roughly 40% of its intervention-driven drop since July 30 as crude oil prices firmed. The Bank of Japan (BOJ) Summary of Opinions from the July 30-31 board meeting did not move the needle on rate hike expectations. The swaps curve continues to price 64% odds of a BOJ hike to 1.25% at the next September 18 meeting.
In July, the BOJ voted 8-1 to keep the policy rate at 1.00% while sticking to its hawkish bias. Takata Hajime supported a 25bps hike. The Summary of Opinions showed that a couple of members argued for the BOJ to focus more on containing upside price risks. One member noted it was “necessary for the Bank to accelerate the pace of adjustment to the degree of monetary accommodation.” Another member highlighted “it is necessary for the Bank to raise the policy interest rate, which is below the lower bound of the broadly estimated range.”
We see room for US-Japan interest rate differentials to narrow further in favor of a lower USD/JPY. Risks are skewed towards a hawkish BOJ repricing and a dovish Fed repricing. The BOJ’s policy rate is near the lower end of its neutral range estimate (1.10%-2.50%) while Japan’s economy is operating above potential. In contrast, Fed policy is restrictive (assuming a neutral rate of 3.00%) and the economy is operating around potential.
CHINA
USD/CNH is holding near its lowest level since February 2023. China July CPI ran cool. Headline CPI dropped more than expected to a six-month low at 0.5% y/y (consensus: 0.8%) vs. 1.0% in June on easing transportation and energy costs. Core CPI unexpectedly fell to a six-month low at 0.9% y/y (consensus: 1.0%) vs. 1.0% in June, underscoring still weak consumer spending activity. Indeed, subdued CPI relative to PPI indicate firms have limited pricing power to pass higher costs onto consumers, squeezing profit margins.
In our view, a continued appreciation in China’s currency can help the country shift its growth model towards consumer spending by boosting disposable income through cheaper imports. Bottom line: USD/CNH downtrend is intact.
