It is an extremely bullish indicator for the JPY if it can shrug off the booming stock markets and risk on fervour to remain firm.
Soaring stock markets around the world sparked by an easing of political fears in France have participated in a tremendous risk-on rally around the world.
Many significant stock indexes (among them the Nasdaq 100 and the German DAX index) have hit all-time highs amid expectations that Emmanuel Macron will win the French election.
Supporting the rising equities further has been the talk and subsequent release of President Trump’s financial plan for tax and economic reform, which had promised huge cuts to both businesses and individuals as well as there being a good deal of hope for positive de-regulation in the financial markets.
Although equities fell initially after the release of the 1 page plan sentiment remains high ahead of Friday’s GDP release, which is forecast to demonstrate a slowing of the US economy.
The Bank of Japan met on Thursday and promptly made no alterations to their significant rate and policy decisions while diminishing its inflation forecasts. Keeping the status quo was evidently the intention of the BOJ and they have no interest in creating any strong bullish momentum in the JPY given its current levels. It does seem evident however, that some economic data in Japan is giving the central bank some things to be pleased about but they are desperate to keep any expectations of a rate hike off the table. Given their dovishness, the performance of the JPY is somewhat impressive given risk-on and central bank speak - both were conspiring to weaken it.
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The guys at Morgan Stanley are still running a 111.00 bid in USDJPY, and remain bullish on the US dollar overall, however, they are looking at selling a decent rally in USDCAD.
"CAD: wait for the dip to buy. Since last Wednesday, markets have been focused on headlines related to the loss of funding (deposits) from a large Canadian subprime mortgage lender. To us, the story in and of itself is not enough to bring down the Canadian system. The problem in this instance appears to have been fraudulent mortgages driving a run on deposits - ie this was a liability, not an asset, problem. However, the story highlights a vulnerability for Canada, which may limit upside for CAD for now. Selling USDCAD around the top end of the channel at 1.40 offers good risk reward."
They also touch on the dairy trade and possible risks from a tariff war between the US and Canada;
"What's the issue with Canada? The crux of the US-Canada dairy trade dispute lies in ultrafiltered milk, an ingredient used to make cheese and yoghurt. Ultrafiltered milk was not subject to Canada's agricultural import tariff quotas as it was developed only after the current trade agreements were passed. This allowed US ultrafiltered milk exports to Canada to be priced competitively.
...should the US impose trade restrictions on Canadian dairy products, it could weaken CAD initially through the expectations channel as investors may be worried about the US administration imposing more trade barriers on other Canadian exports, potentially posing as a drag to Canada's exports and hence economic growth. However, the currency weakness would only be sustained to the extent that the trade barrier causes an actual slowdown in Canada's growth, prompting the BoC to cut rates.
The markets are pricing 28bp of rate hikes for the BoC by end- 2018, so any pricing in of BoC rate cuts would weaken the CAD. However, while about half of Canada's dairy exports go to the US, the dairy industry contributes only about 1% to GDP, so any US trade restrictions limited to Canadian diary exports are unlikely to have a significant impact on growth."
Such a backdrop, according to ING, should be EUR positive and lead to 'the first one-off discrete jump' from its current levels to the 1.15 level by September.
"As was the case during the US taper tantrum in 2013, we expect long dated EZ yields to increase meaningfully in response to the market anticipating a lower pace of ECB purchases, in turn directly benefiting EUR (similar to the 2Q15 period when Bunds sold off and EUR/USD rallied)," ING argues.
As such, ING expects EUR/USD to stabilize around the 1.15 'gravity line' in Q3 and throughout the end of this year but warns of some episodes of undershoots especially around the end of this year, when market participants start becoming concerned with Italian election risk.
Looking further, ING expects the second discrete jump in EUR/USD to 1.20 around mid-2018 when the second leg of the ECB monetary policy normalization kicks in.
Warnings that Sterling is looking over-priced at current levels against the single currency come on the day Sterling dipped against a host of its major competitors on news the Bank of England had downgraded its forecasts for the UK economy for 2017.
Slowing growth rates in the UK are one reason why analysts at Intessa Sanpaolo say they expect further declines in the Pound’s value against the Euro and US Dollar.
But, for Intesa Sanpaolo it will be politics that weigh more than any other factor.
“The likely mounting of tensions with the EU over Brexit as soon as negotiations begin leaves Sterling exposed to a retreat,” says Luca Mezzomo, Chief Economist at Intesa Sanpaolo.
Only a strong set of economic data releases is seen negating their view.
And news that the Bank of England is cutting their growth forecasts for the UK economy to 1.8% for 2017 put paid to such expectations.
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BofAML's bearish view on AUD is in line with its economists' call on China as they continue to believe that cyclical growth momentum has peaked out and will weaken in 2H as the impact of policy tightening kicks in.
"Two indicators that we track in the context of Australia are consistent with this: 1) High frequency steel production rates published three times a month declined through April at a nationwide level, although the growth rate at key factories remains high. 2) Port shipment data from Australia typically provide the timeliest indicator of Australia's commodity exports and are often released even ahead of China's import data. Iron ore shipment volumes from Port Hedland remain high but the growth rate declined in April," BofAML argues.
All in, BofAML's base case is that as China slowdowns becomes more apparent, AUD/USD will test 0.70 before year-end.
Such price action, according to BTMU, provides further evidence of the ongoing loss of confidence in the Trump administration’s ability to materially boost US growth with the the latest political developments in the US are contributing to building investor skepticism in that regard.
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"We have argued that the Fed will be hiking faster than markets expect, particularly in 2018. We also expect the ECB to announce QE tapering this fall, as they are not willing to increase the issue limit or relax the capital key-we see depo rate hikes after QE ends next year. As the BoJ remains committed to yield targeting, we would expect JPY to weaken against both USD and EUR," BofAML argues.
What's the trade: Buy dips in EUR/JPY tactically for 129.
"We see more upside for EURJPY in the months ahead, but we would trade it tactically given how much it has already moved.. Our equilibrium EURJPY estimate is 129, but spot can move above this level during the business cycle when monetary policies diverge. The next EURJPY move could be slower and choppier, but we would be buying any dips while in a risk-on market," BofAML recommends.
What's the trade? Buy dips in USD/JPY strategically for 120 and sell rallies above that level.
"We also see more upside for USDJPY, but it could take a little longer... We would be more concerned about US rhetoric about currency manipulation if the USD/JPY rallies decisively beyond 120, but we are not there yet. We would buy dips on the USDJPY into 120 and sell the strength above the level," BofAML adds.
"We believe the market ignored the hawkish bits of minutes, instead focusing on the ’prudence’ of awaiting additional evidence to hike rates again. We think this is a low bar to clear and note that the read from the high-frequency data shows the economy growing above trend," TD argues.
"The takeaway is that while growth has lost momentum in recent months, it continues to track above potential. This, along with the steep discount in the USD and the upcoming US data releases, leaves us tactically favoring USD upside in G10," TD adds.