- Yen recovered only temporarily on Kuroda’s remarks…
- …while the euro has remained resilient for now…
- The Swedish krona rallies on higher inflation data
Yen’s temporary recovery
Last Friday, USD/JPY approached 126 driven by the much-stronger-than-expected US employment report. However, at the start of this week the move lost momentum, as the US dollar was generally weak. On Wednesday morning Bank of Japan chief Haruhiko Kuroda said in the parliament “the yen is unlikely to weaken further in real effective terms if you think with common sense”. His comments had a considerable impact. The yen strengthened by around 1.5%. Such a move looks substantial. However, if the overall trend is taken into account it is just a minor move.
As long as the former break-out level in USD/JPY (122) remains in place, we remain confident in the rally in USD/JPY will continue. Moreover, the direction in USD/JPY also heavily depends on the overall US dollar sentiment. The stronger-than-expected US retail sales report has probably taken away doubts about the state of the US economy. Looking ahead, we expect USD/JPY to reach 135 next year, on the back of monetary policy divergence and yield divergence between the US and Japan.
Despite the sharp sell-off in EUR/USD last Friday on the strong US employment report, the euro recovered strongly this week. The usual suspect was again development in the bond markets. The rise in 10y German bond yields was at a faster pace than the rise in US Treasury yields and this supported EUR/USD. Recently, ECB’s Coeure said that the ECB won’t let sharp market movements threaten price stability. If movements in financial markets continue to tighten financial conditions, then the ECB will probably step up verbal intervention. It could eventually step up QE or announce a later QExit than September 2016 (see Global Daily Insight 11 June 2015, Five factors the ECB will watch). We expect ECB QE to weigh on the euro and expectations of a start of Fed rate hikes this year to spark a substantial US dollar rally.
NZD falls sharply after RBNZ rate cut
The RBNZ surprised financial markets by cutting key interest rates by 25bp to 3.25% and signaling another rate cut in the coming months. As a result, the New Zealand dollar weakened significantly. We expect NZD/USD to weaken further to 0.66 at the end of this year.
Swedish krona rallies on higher inflation data
The Swedish krona rallied strongly after inflation data surprised on the upside. Headline CPI yoy moved into positive territory again (0.1%). As a result, the probability of further monetary easing by the Riksbank this year has decreased. However, we judge it is too early to call the end of deflation. Since 2013, Swedish headline inflation has moved in a -0.65 to 0.25 range and it frequently moved above zero. The Riksbank will decide on monetary policy on 2 July.