Yen Jumps as Governing Coalition Loses Majority in Upper House

[Redator]

Overview: The US dollar begins the new week with a softer bias, but it still needs to run the North American gauntlet, which has tended to be more constructive than other centers recently. As seemed likely, less than a year after losing its majority in the lower, the LDP and Komeito coalition lost its majority in the upper chamber yesterday. Japanese domestic markets were closed for a national holiday, but the yen strengthened om the news, even before the US 10-year yield extended its pullback for the fourth consecutive session. The greenback is mostly softer against the G10 currencies and most emerging market currencies today. 

Except for Taiwan and Australia, most large equity markets rose in the Asia Pacific region. Europe's Stoxx 600 is little changed and US index futures are slightly firmer. Benchmark 10-year yields are softer. In Europe, yields are mostly 3-5 bp lower and the 10-year Treasury yield is off a little more than three basis points to about 4.38% to slip below last week's low. Gold is trading firmly but must resurface last week's high a little above $3377 to lift the tone. August WTI reversed lower after reaching after setting the week's high before the weekend almost $69. Follow-through selling today has seen it slip slightly through $66.90. The 200-day moving average is near $66.70.

USD: From the July 1 low through last Thursday's high, the Dollar Index appreciated by almost 2.7%. Although DXY was softer ahead of the weekend, it settled near session highs, as once again North American participants seemed to have a more constructive attitude toward the dollar than other centers. The Dollar Index is but softer within last Friday's range. A move above 99.00 could signal a test on the June 23 high closer to 99.40. Last Wednesday's low near 97.70 is important. A break of it will strengthen ideas that the upside correction is over. This is a relatively quiet week for US data, and Fed officials will be quiet ahead of the FOMC meeting at the end of the month. The notable exception is Fed Chair Powell's welcoming remarks at a regulatory conference tomorrow. On tap today is the index of leading economic indicators, which does not typically elicit much of a market response. 

EURO: The ECB meeting on Thursday is the highlight of the week, but the risk of a surprise rate cut seems slim to none. The euro's downside correction this month is the fifth this year that lasted a week or more. It has lasted about two-and-a-half weeks in duration so far and the magnitude of the pullback (~2.3%) is less than the average correction (~3.2%). An average pullback would take it to around $1.1450, which is where the (50%) retracement of the rally since mid-May is found, while the (38.2%) retracement is near $1.1535. That said, we remain more inclined to suspect that the euro's correction is over or nearly so and a move above $1.1720-25 boosting our confidence. A move above last Friday's high (~$1.1670) would be constructive. The session high has been recorded in the European morning slightly above $1.1650. Options for 1.8 bln euros at $1.1640 expire today. 

CNY: Last Wednesday's range remains important for the dollar against the offshore yuan (~CNH7.1685-CNH7.1920). Beijing wants a broadly stable dollar-yuan exchange rate. So, while the dollar declines, the yuan tends to decline against most other currencies, but when the dollar is trading higher, like it has this month, the yuan tends to appreciate against its other trading partners. That is very much the case. The yuan has risen against all the G10 currencies here in July, and most emerging market currencies. The PBOC has been bringing down the dollar's fix. The low fix last week was the lowest since early November 2024. Today's reference rate was set at CNY7.1522 (CNY7.1498 before the weekend. It is the fifth increase in the last six sessions. Unsurprisingly, Chinese banks left their loan prime rates steady at 3.0% and 3.5% for one- and five-year tenors, respectively. Given the low rate of inflation, real interest rates seem high, but Chinese officials seem in no hurry to cut rates. While the conventional narrative attributes the low inflation to weak consumption, we argue it is more a function of over-investment. In recent weeks, Beijing has expressed concern about the excess capacity, and this may be echoed by the politburo meeting expected to take place in the last week of the month. We also have highlighted that Chinese companies have access to patient capital (state-owned banks), which affords them the opportunity to compete for market share. In contrast, companies in the US rely more on impatient markets that want to see earnings growth on a quarterly basis, spurring competition for profits rather than market share. 

JPY: The release of government stockpiles of rice drove the price to a five-month low, but it did not prove sufficient for the LDP and its junior coalition partner, Komeito to retain its majority in the upper house. The coalition fell three seats shy. The last three LDP prime ministers that lost an upper house majority left office within two months of the loss. Some think that the agriculture minister and son of the former prime minister, Koizumi, has gotten high marks for the pullback in rice prices and is a potential successor to the beleaguered Prime Minister Ishiba. The dollar continues to trade within last Wednesday's trading range (~JPY146.90-JPY149.20). It is heavier today, and in a roughly JPY147.70-JPY148.65 range. The robust, even if not stable, 30-day correlation between changes in the exchange rate and changes in the 10-year US Treasury yield suggests it may offer directional clues. The six-week-old cap around 4.50% on the US 10-year yield held last week. It is off three basis points today to around 4.37%. Last week's US TIC data show private sector foreign demand for Treasury bonds was strong. They bought almost $120 bln of Treasuries in May after having bought a cumulative $172 bln in the previous four months. 

GBP: Despite a string of disappointing UK data, sterling looked like it formed a base last week around $1.3365-75. It recovered a cent before the weekend but was turned back in North America. It has largely held above $1.3400 today and reached $1.3465 in early European activity. A move above the $1.3475-85 area would help lift the technical tone. Options for almost GBP700 mln at $1.3475 expire today. 

CAD: The greenback set the high for the month last Thursday near CAD1.3775. It had started the session around CAD1.3680. That range is important. The high was in front of more formidable resistance near CAD1.3800, and the low was the upper end of a band of support extends to CAD1.3650. It is trading in an exceptionally narrow range today, ~CAD1.3710-CAD1.3735. Options for about $715 mln struck at CAD1.3745 expire today. The Bank of Canada's business surveys will be released today. They typically are not impactful. The swaps market expected the central bank to remain on hold here in Q3 and has slightly less than a 50% chance of a cut in October is  discounted. 

AUD: The Australian dollar recovered from around $0.6455 on Thursday to slightly above $0.6540 ahead of the weekend. In one fell swoop, it retraced (61.8%) of the decline from the July 11 high for the year (~$0.6595). But it was not able to sustain the upside momentum and returned to almost $0.6500 in the North American afternoon. It is trading quietly today, between $0.6500 and $0.6525. There are A$820 mln options at $0.6500 that expire today. A close below the $0.6480 area would sour the near-term technical tone. The minutes from the recent Reserve Bank of Australia meeting will be released early tomorrow and are expected to underscore the message from Governor Bullock that the surprise decision to stand pat turned on the timing not the direction of travel. After last week's disappointing employment report and a jump in the unemployment rate, the futures market is even more confident of a rate cut at next month's meeting. The current cash rate target is 3.85% and the futures market implies a year-end rate of a little less than 3.20%. That suggests in the next four meetings, the futures market is discounting two cuts fully and around a 60% chance of a third. Lastly, we note that a softer Q2 inflation report helped encourage speculation that the Reserve Bank of New Zealand will cut rates when it meets next month. The implied odds in the swap market rose to about 85% today from about 68% before the weekend. 

MXN: The US dollar spent the last three sessions coiling with last Tuesday's range of roughly MXN18.65 to MXN18.8850. It continues to coil today in about a MXN18.6940-MXN18.7475 range. Daily momentum indicators are constructive. As a proxy for the near-term trend, the five- and 20-day moving average is useful. The dollar's five-day moving average has been below the 20-day moving average since mid-April. They may cross today or tomorrow. Given carry, if one is already a long peso, one is still being paid to be long. If one is looking to buy pesos, be patient but opportunistic. The upside risk may extend toward MXN19.00. The mid-July CPI, due Thursday is the data highlight, and the headline right may have softened for the third consecutive time. 

Disclaimer