USD/JPY rose 0.7% to 160.80, its highest close since December 1986. Emboldened by the USD/JPY’s break above the psychological 160 level, speculators are targeting the 170 level, betting that any intervention by Japan will not overcome the yen’s wide negative interest rate differential against the greenback amid the Fed’s patience in lowering rates. Japan last intervened between April 26 and May 29 when USD/JPY was lower in the 153-158 range. The greenback was also lifted by the US Treasury 10Y yield, rising 8.5 bps to a three-week high of 4.33% vs. the 2.6 bps increase in the 10Y JGB yield to 1.03%. Interest rate futures reduced the probability of a Fed cut in September to 56.5% from 63.5% a day earlier on stronger-than-expected inflation in Australia and Canada, stoking fears that global disinflation had lost momentum.
Even so, the bet by speculators against the JPY is not without risks.
On Friday, a decline in the critical US PCE inflation could pave the way for Japan to intervene. Although Australia’s CPI inflation rose to 4% YoY in May from 3.6% YoY in April, it declined by 0.1% MoM in May after two months of 0.7% MoM increases. Conversely, Canada’s CPI inflation did rise to 0.6% MoM in May from 0.5% in April. However, the US PCE deflator has and should continue to mirror the decline in US CPI inflation, which flattened to 0% MoM in May from 0.3% in April. If so, the US 10Y bond yield will likely meet resistance at 4.36% (100-day moving average) and decline. USD/JPY is also overbought, with a 14-day relative strength index above 70. DXY is also approaching a trendline resistance at 106.25, but its fate depends on how the EUR and GBP hold up in the snap elections in France and the UK. The Fed appears to have a caveat for its “high for longer rates” stance, i.e., its readiness to lower rates should the US labour market weaken more than thought. Consensus expects next Friday’s nonfarm payrolls to slip below 200k in June, consistent with Fed comments that May’s 272k was likely overstated.
Pay attention to the first US Presidential Debate between President Joe Biden and former President Donald Trump in the US tonight (or tomorrow morning in Singapore). Trump blamed Biden for the USD’s rise to a 34-year high against the JPY on April 25, which coincidentally was a day before Japan intervened. Last week, Trump warned that countries were dropping the USD “like flies” and that the greenback could lose its dominant position in global trade. Biden and Trump are likely to trade barbs over who is more responsible for America’s large fiscal deficits and ballooning federal debt, a reminder of the greenback’s medium-term vulnerability as a reserve currency.
Quote of the day
“Exploring the unknown requires tolerating uncertainty.”
Brian Greene
27 June in history
Roger Moore and Timothy Dalton first appeared as James Bond in 1973 and 1987, respectively.\
Topic
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