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The yen’s depreciation has further to run

We think the yen will drop even further as policy divergence widens. We now forecast USD/JPY to reach 140 by the end of this year, before dropping back as the Fed takes its foot off the gas in 2023. In view of the wider interest, we are also sending this FX Markets Update to clients of our Japan Service.
Jonas Goltermann Senior Markets Economist
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FX Markets Weekly Wrap

Dollar rallies as hope for a Fed pivot proves short-lived

The huge upside surprise in US payrolls data pushed the greenback higher against most major currencies today in an otherwise quiet week for FX markets. The continued strength of the labour market in the US adds to our conviction that the Fed remains some way off from taking its foot off the brakes, a message echoed by several Fed officials earlier in the week. By contrast, many other central banks face more difficult trade-offs: the latest labour market data from New Zealand and Canada showed falls in employment; the BoE and RBA both hiked by 50bp but revised their forecasts to reflect higher inflation and lower growth; and some emerging market central banks appear to be at or near the end of their tightening cycles. Next week’s US CPI data, which we expect will show continued strong core price pressures even if headline inflation slows, could put another nail in the coffin of the ‘pivot’ narrative. Even in the absence of further divergence in monetary policy, we expect slowing global activity and worsening risk sentiment to, underpin further strength in the greenback over the rest of the year.

5 August 2022

FX Markets Outlook

We think the dollar rally still has further to run

We think the dollar will appreciate further through at least the end of the year as the global economy continues to falter and “safe-haven” demand remains strong. Although we see limited scope for a further widening of expected interest rate differentials in favour of the greenback, we expect an environment in which the Fed and other major central banks continue to tighten monetary policy, even as economic growth slows, to support further dollar strength. We expect risky assets to remain under pressure for some time yet, and we believe that long-term yields have already peaked for this cycle. And previous peaks in the 10-year US Treasury yields have, more often than not, coincided with further dollar appreciation. We think a similar story will play out this time around as safe-haven demand makes the dollar, alongside the yen and the Swiss franc, the best performing currencies over the rest of this year and, probably, some way into 2023.

4 August 2022

FX Markets Weekly Wrap

Dollar struggles on market’s hope of a Powell pivot

The dollar looks set to lose further ground this week after the FOMC’s 75bp hike was, somewhat strangely, interpreted as the start of a dovish pivot and US Q2 GDP disappointed. However, the greenback has rebounded a bit today after income and spending data proved more robust and indicated continued strong price pressures. Our sense is that the risk-on response to the FOMC is largely down to a combination of wishful thinking and stretched positioning. In our view, there was little in Chair Powell’s remarks to suggest policymakers will abandon aggressive rate hikes while inflation remains so far above target. Indeed, he emphasised that policymakers anticipate that bringing inflation back to target will involve ”a period of below-trend growth and some softening of labour market conditions” – an unusual admission from a central bank governor. If we are right that markets have misread the Fed’s intention, the dollar will probably resume its rally before too long.

29 July 2022

More from Jonas Goltermann

Capital Daily

What to make of the yen’s drop and intervention chatter

While it has stabilised today, the ~10% depreciation of the Japanese yen over the past month or so is extraordinary. With some policymakers now hinting at FX intervention to stem the currency’s slide, it is worth examining how this unusual situation has arisen and what the implications might be, both for the yen exchange rate and financial markets more broadly.

20 April 2022

Capital Daily

RBNZ: A kiwi in a coalmine?

While today’s 50bp policy rate hikes from the RBNZ and the Bank of Canada point to the aggressiveness of the global monetary tightening cycle now underway, the market reaction to their announcements suggests that investors are already starting to think about the end of that tightening cycle.

13 April 2022

FX Markets Weekly Wrap

Le Pen & sanction risk put euro under more pressure

The US dollar has risen across the board this week as the Fed’s hawkish message on “quantitative tightening”, renewed sanction risks in Europe, and the polling shift in favour of far-right candidate Marine Le Pen ahead of France’s presidential election put pressure on risk sentiment, especially in Europe. The euro is now around its weakest level in two years against the dollar and has lost ground against most other currencies too. The first round of the election is on Sunday; as we set out here, if Le Pen continues to make gains ahead of the second-round run-off on 24th April, we expect that to put further pressure on the euro, and euro-zone financial markets generally.

8 April 2022
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