On the 22nd of June ,Mitsubishi UFJ Financial Group Research released its Global Markets Monthly , where it covered several topics and we thought was interesting to share their view on FX, given their regional presence.
Below there are the highlights of MUFG report on USD/JPY , EUR/USD and USD/CNY
USD/JPY Range : 136.00-145.50 Bearish
The USD/JPY currency pair has breached the suggested range at 141.00, largely due to the support provided by the risk in US yields and the resilience of US and global equity markets. Chair Powell’s recent testimony to Congress indicated that the Fed’s pause in hiking rates was a reflection of its ability to slow the pace of tightening, rather than an end to tightening. If US data remains strong, the FOMC could potentially hike rates again, leading to further buying of USD/JPY.
However, there is a bearish view on USD/JPY based on the belief that the US economy is not as strong as implied by the gains in non-farm payroll employment. Weaker household survey data, continued and initial claims data, and contracting GDI suggest weaker employment in the future. This viewpoint leads to the expectation that the Fed is unlikely to raise the key fed funds policy rate.
Despite the resolution of the debt ceiling issue, there may still be volatility during the summer months due to a substantial drain of liquidity caused by large volumes of T-bill issuance by the US Treasury. The selling of the yen also reflects the limited expectations of a change in monetary policy from the Bank of Japan (BoJ). The BoJ’s officials have indicated little chance of a policy change, citing limited distortions in the JGB market and the need for stronger wage growth to sustain inflation.
Inflation expectations in Japan have been high, reaching levels not seen since the burst of the bubble in Japan. Consumers believe inflation will increase in the next year, and the 10-year breakeven rate hit its highest level since 2015. Land and property prices in Japan are also rising modestly.
Overall, the reporter maintains a bearish view on the US dollar, including USD/JPY. Japan’s current account balance is expected to improve, tourism is rebounding, and the energy price decline is shrinking the energy trade deficit. The short-term bias for USD/JPY is bearish, driven by expectations of another pause in rate hikes by the Fed in July. However, buying interest in USD/JPY may diminish at higher levels due to potential opposition from Tokyo regarding further yen weakness.
EUR/USD Range: 1.0700-1.1200 Bullish
The EUR has rebounded against the USD this month, reversing most of the sell-off from May. After reaching a low of 1.0635, EUR/USD has climbed back towards the top of its year-to-date range. The trend of higher highs followed by higher lows indicates a bullish trend that remains in place. The forecast suggests the pair will return to pre-Ukraine levels around the 1.1500-level in early 2022.
The USD correction lower has been influenced by the Federal Reserve’s decision to leave rates unchanged, causing skepticism among rate market participants about further rate hikes without stronger economic and inflation data. However, there is now a higher probability of at least one more hike in July, which is already priced in. Weak economic data would be needed to prevent a July hike.
The EUR rebound has also been supported by the European Central Bank’s increased focus on the outlook for core inflation. The ECB revised their staff forecasts higher, indicating concern among policymakers about persistent higher inflation. President Lagarde stated that another 25bps hike at the next meeting in July is highly likely. The ECB is expected to face pressure to deliver a final hike in September.
External factors, such as China’s economic recovery losing momentum, have impacted EUR/USD as well. China has implemented policy stimulus measures in response to slower growth, including lowering rates. However, more fiscal stimulus measures in the future could provide additional support for EUR/USD.
USD/CNY Range: 6.9000–7.2500 Bullish
China’s key economic indicators for May showed sequential improvements, but on a year-on-year basis, there was a broad-based growth deceleration. Retail sales, year-to-date fixed asset investment (FAI), and property investment all fell below market expectations, while industrial production growth was in line with expectations. The youth jobless rate hit a record high of 20.8% in May, posing challenges as millions of fresh graduates enter the workforce.
To stimulate the post-pandemic recovery and restore market confidence, the People’s Bank of China (PBOC) recently took action. They lowered the reverse repo and MLF rates and reduced the benchmark loan prime rate (LPR) for corporate loans and mortgages. These measures were slightly weaker than what the market anticipated. The Chinese government also pledged to implement stimulus plans to stabilize growth, with a focus on expanding effective demand, strengthening the real economy, and managing risks.
Expectations of diverging monetary policies between the US Federal Reserve and the PBOC may lead to a weak Chinese yuan (CNH) in the near term. Further rate cuts from the PBOC, along with an expected rate hike from the Fed, could widen negative yield spreads with the US and exert downward pressure on the CNH. However, once concrete stimulus policies are implemented, the CNH is expected to rebound against the dollar. Positive factors for the medium-term include potential improvements in the yield spread, relative GDP growth rate, and sentiment, which could drive the CNH’s appreciation. The expectation is for USD/CNY to drop back to the 6.8000-level by the end of the year.
