Yen Weakens as Market Tests the BOJ

June 26, 2024
  • Fed officials remain hawkish; CFNAI for May is worth discussing; Canada May CPI ran hot; Brazil reports mid-June IPCA inflation
  • ECB doves are starting to push back; ECB may be getting more concerned about France; Germany reported soft July GfK consumer confidence; U.K. CBI reported a soft distributive trades survey for June
  • Markets are on alert for intervention as USD/JPY trades above 160 again; Australia May CPI ran hot

The dollar rally continues as markets test the BOJ. DXY is trading higher for the second straight day near 105.923 and remains on track to test the April-May highs near 106.50. USD/JPY tested the April high near 160.15 but markets remain wary of BOJ intervention (see below). The euro is trading lower near $1.0685, while sterling is trading lower near $1.2660. AUD is outperforming after May CPI ran hot (see below). Recent data support our view that the backdrop of persistent inflation and robust growth in the U.S. remains largely in place, and so the Fed remains in hawkish mode (see below). At the same time, weaker data in many of the major economies underscore the widening economic and monetary policy divergences that should continue to support the dollar.


Fed officials remain hawkish. Bowman said “We are still not yet at the point where it is appropriate to lower the policy rate. Given the risks and uncertainties regarding my economic outlook, I will remain cautious in my approach to considering future changes in the stance of policy.” She revealed that she sees no cuts this year, making her one of four Fed policymakers with a 2024 Dot at 5.375%. Seven see one cut and eight see two cuts. However, Bowman warned "I remain willing to raise the target range for the federal funds rate at a future meeting should progress on inflation stall or even reverse.” Elsewhere, Cook was more measured and said “With significant progress on inflation and the labor market cooling gradually, at some point it will be appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy. The timing of any such adjustment will depend on how economic data evolve and what they imply for the economic outlook and balance of risks.” The market continues to see November as the most likely meeting for a cut, though there are 70% odds of a cut in September. As always, it will come down to the data.

Chicago Fed National Activity Index for May is worth discussing. Headline came in at 0.18 vs. -0.25 expected and a revised -0.26 (was -0.23) in April. As a result, the three-month moving average came in at -0.09 vs. a revised -0.05 (was 0.01) in April. Recall that when this average drops below -0.7, it signals imminent recession, and we are still far from that threshold.

Housing data will remain in focus. May new home sales are expected at -0.2% m/m vs. -4.7% in April. Pending home sales will be reported tomorrow and are expected at 0.6% m/m vs. -7.7% in April. Last week, existing home sales came in at -0.7% m/m vs. -1.0% expected and -1.9% in April. With mortgage rates edging lower, some are looking for some relief for the housing sector in the coming months.

Canada May CPI ran hot. Headline came in at 2.9% y/y vs. 2.6% expected and 2.7% in April, core trim came in at 2.9% y/y vs. 2.8% expected and a revised 2.8% (was 2.9%) in April, and core median came in at 2.8% y/y vs. 2.6% expected and actual in April. Headline accelerated for the first time since March and moved to the top of the 1-3% target range. We doubt the BOC will deliver a follow-up rate cut in July, but a September rate cut remains a strong possibility. Odds of a rate cut have fallen to 25% in July and 80% in September. Of note, there are three CPI reports to come ahead of the September 18 policy-setting meeting.

Brazil reports mid-June IPCA inflation. Headline is expected at 4.11% y/y vs. 3.70% in mid-May. If so, this would be the first acceleration since mid-February. Minutes from last week’s COPOM meeting tilted hawkish. The bank said it does not see any economic slack. It also raised its estimate for r* by 25 bp to 4.75%, noting that “the lack of commitment to structural reforms and fiscal discipline, the increase of earmarked credit granting, and the uncertainties about the stabilization of the public debt have the potential to raise the neutral interest rate of the economy.” Central government budget data for May will also be reported today and consolidated budget data will be reported Friday. In between, the central bank releases its quarterly inflation report tomorrow.


The ECB doves are starting to push back. Rehn said “If you look at market data, it implies that there would be two more rate cuts so that we would end up at 3.25% by the end of this year and, with the terminal rate somewhere around 2.25%, 2.50%. In my view, they are reasonable expectations.” Rehn is one of the only ECB officials to confirm current market expectations. The market sees around 10% odds of a cut in July and rising to nearly 80% in September. Another cut in December is nearly priced in. Lane and Kazaks speak later today.

The ECB may be getting more concerned about France. After several top bank officials initially downplayed recent events there, Panetta warned “Political turnover physiologically translates into policy uncertainty: households and investors need to form a view on how incoming governments will handle many critical economic and political decisions. It can trigger capital outflows and currency depreciations, creating upward price pressures. But it could also shake confidence and weaken demand, halting or even reversing the fragile recovery we have seen so far.” He added that “Central banks should be prepared to deal with the consequences of such shocks if and when they materialize. This implies a readiness to use the full range of tools at their disposal to adjust the monetary stance, addressing any threats to price stability, and protect the transmission mechanism of monetary policy.”

Germany reported soft July GfK consumer confidence. Headline came in at -21.8 vs. -19.5 expected and a revised -21.0 (was -20.9) in June. This was the first drop since February and mirrors the recent drop in business confidence and PMI measures. We expect this deterioration to continue.

U.K. CBI reported its distributive trades survey for June. Total reported sales came in at -9 vs. 7 in May, while retailing reported sales came in at -24 vs. 8 in May.


Markets are on alert for intervention as USD/JPY trades above 160 again. We remain skeptical, as policymakers have signaled that it’s more about the pace of depreciation than defending any particular level. Indeed, MOF official Kanda recently stressed that there was no specific level for intervention and has 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 somewhere between 160-165 but will hinge crucially on the pace.

Australia May CPI ran hot. Headline came in at 4.0% y/y vs. 3.8% expected and 3.6% in April. This was the third straight month of acceleration to the highest since November and moves further above the 2-3% target range. The most significant price rises were in housing, food and non-alcoholic beverages, transport, and alcohol and tobacco. CPI ex-volatile items and holiday travel remained sticky at 4% while the more policy-relevant trimmed mean measure surged to a six-month high of 4.4% vs. 4.1% in April. The market is now pricing in nearly 40% odds of a 25 bp rate hike September 24, rising to nearly 50% for November 5. The Q2 CPI report due at the end of July will be a key data point shaping the RBA’s August 6 policy decision. Overall, the bar for an RBA rate hike is low as the Board has already been discussing the option of raisings rates further in recent meetings. RBA Assistant Governor (Financial Markets) Kent talked about restrictive financial conditions in Australia but did not offer any new policy guidance.  

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