USD/JPY ended July below 150 for the first time since March 18. The JPY was the best-performing currency in July, appreciating 7.3% to 149.49 per USD. With July gains reducing full-year losses to 6%, the JPY relinquished its infamous reputation as the worst-performing currency this year. TWD became the worst performer with a 6.1% ytd loss, followed by the KRW with a 6.5% decline. Southeast Asia’s weakest currencies, such the MYR and the THB, have been riding the coattails of the JPY’s rebound.
On July 31, the Bank of Japan and the US Federal Reserve gave markets precisely what they wanted.
The BOJ was resolute in normalizing monetary policy by increasing its uncollateralized overnight call rate a second time this year by 15 bps to 0.25% and gradually reducing the amount of monthly JGB purchases from JPY 5.7 trillion in the Jul-Sep 2024 quarter to JPY 2.9 trillion in the Jan-Mar 2026 quarter. The BOJ kept the door open for more hikes into next year, assuming CPI inflation less fresh food were on track to hit its forecast of 2.5% and 2.1% for Fiscal 2024 and 2025, respectively. The BOJ has also scheduled an interim assessment of its reducing bond purchase plan in June 2025. The narrowing 10Y yield differential between US Treasuries and JGBs suggests USD/JPY can fall farther below 150 towards 146.50, or the low seen in early March.
Fed Chair Jerome Powell said an interest rate cut on September 18 is “on the table” on the condition that incoming US data further increase confidence in inflation moving sustainably towards the 2% target or signalled the urgency to avert a potentially sharp downturn in the labour market. As of June, PCE headline and core inflation were 2.5% YoY and 2.6%, respectively, below the 2.6% and 2.8% levels the Fed projected for 4Q24 in the June Summary of Economic Projections (SEP). Tomorrow, the Fed will pay attention to the unemployment rate, which rose to 4.1% in June, slightly above the 4% forecast in the SEP. Following yesterday’s decline in ADP employment to 122k in July from 155k in August, stay alert to higher-than-expected initial jobless claims and a weaker ISM manufacturing print today. The Fed could provide traction for a September cut at the Jackson Hole Symposium on August 22-24, assuming a higher jobless rate tomorrow and a fourth decline in CPI inflation on August 14.
Against this background, GBP/USD has a weak bias within its week-long range of 1.28-1.29 into the rate cut anticipated at today’s Bank of England meeting. GBP is still feeling the weight of the unwinding of JPY carry trades. Following its 1.7% plunge to 192.82 yesterday, GBP/JPY is nearly fully retracing its rally from 191.40 to 208.10 between May 3 and July 11. The OIS market has discounted another rate cut by the BOE in November to 4.75% on top of today’s 25 bps cut to 5%. The BOE’s guidance will determine if it leans closer to the three cuts discounted for the Fed this year.
Quote of the day
”Success is often the result of taking a misstep in the right direction.”
Al Bernstein
1 August in history
France became the first country to use the metric system in 1793.
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