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FX Daily: USD is supported by its relative strength against the EUR and JPY
Fed’s summer hike to eclipse ECB’s, market alert to JPY intervention risks
Group Research - Econs, Philip Wee5 Jun 2023
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    On 3 June, two days before X-date, US President Joe Biden signed the bipartisan-supported Fiscal Responsibility Act to suspend the US federal debt ceiling until January 2025. Despite the relief of America averting a debt default, the market is wary of tightening liquidity conditions from the US Treasury issuing some USD1 trillion of Treasury bills in 2H23 and the Fed keeping the door for a hike or two into summer.

    In early May, the US Treasury 2Y yield bottomed at 3.80% when the Fed delivered what many expected was the last hike of the cycle. However, US CPI inflation jumped to 0.4% MoM in April from 0.1% in March. Last Friday, nonfarm payrolls surged to 339k in May, crushing the consensus for 195k jobs. The Bureau of Labor Statistics also revised April’s 230k to 253k. Today, markets will look for upside surprises in prices paid and employment in the ISM Manufacturing PMI Survey. Over the past month, the 2Y yield rose to 4.50%, pulling the DXY to a two-month high of 104.

    Although the Fed may pause at the FOMC meeting on 14 June, it could lift the 2023 Fed Funds Rate forecast in its dot plot. Interest rate futures have placed a higher bet for a Fed hike In July or September. However, they could revisit June hike prospects if the Reserve Bank of Australia tomorrow and the Bank of Canada on Wednesday surprise with rate hikes instead of pausing. Hence, any bounce in the CAD and AUD will likely be short-lived. 

    DXY is supported by EUR, its most significant component. Over the past month, EUR fell from 1.11 to 1.07. Despite the European Central Bank’s plan for more hikes in June and July, its narrative focused on a potential pause in September. EUR was also weighed by Germany, the EU’s largest economy, entering a technical recession. EUR bulls will not welcome another slide in today’s EU Sentix Investor Confidence Index to -15.1 in June from -13.1 in May.

    Last week, the ECB assessed that financial stability vulnerabilities in the euro area remained elevated. Interestingly, the ECB was more concerned about threats to the financial system from future policy normalization by the Bank of Japan than the recent bank turmoil in the US and Switzerland. Technically, EUR is currently pressured by the 100-day moving average (MA) cutting above the 20-day MA. In the last week of May, the 50d cut above the 20d MA sent EUR below 1.08. 

    Japanese officials have restarted verbal interventions with Fed hike expectations keeping USD/JPY near a six-month low of 140. Last week, Bank of Japan Governor Kazuo Ueda said it was premature to discuss the details of an exit strategy from its ultra-loose monetary policy. Ueda expects CPI inflation to slow towards the middle of this FY. Many also expect the BOJ to hold policy amidst speculation for Prime Minister Fumio Kishida to call a snap election. Apart from a surge in public approval after successfully hosting the G7 Summit in May, Kishida’s party won four of the five by-elections in April. Unlike last year, a higher USD/JPY is not keeping the Nikkei 225 index flat but propelling it to its highest level since 1990.

    Quote of the day
    “Successful investing is anticipating the anticipations of other.”
         John Maynard Keynes

    5 June in history
    John Maynard Keynes, the founder of modern macroeconomics, was born in 1883.

     

     

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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