The sell-off in the Japanese yen extended yesterday sending the currency to the lowest levels since 1986 against the US dollar and to the lowest levels against the euro. The EUR/JPY is now flirting with the 172 level, while the USD/JPY is consolidating gains above the 160 level. The only thing that prevents the yen from a further fall is the direct intervention risk. But other than that, the yen deserves to lose more blood. One-year risk reversals, which show how traders feel about the yen over a longer time, hint that they're still kind of excited about the yen compared to the dollar. But that excitement is fading fast as the Bank of Japan (BoJ) keeps delaying its intervention plans meanwhile the Federal Reserve delays its rate-cutting plans. The BoJ is expected – is obliged – to give a clearer roadmap regarding how it will reduce its bond purchases in July meeting. They might also be obliged to hike rates given that the pressure on the yen won’t ease until concrete steps are taken on the policy front. Everyone knows that a direct FX intervention will be nothing more than just another morphine injection: it won’t give the yen more than a temporary relief.
Elsewhere, the euro remains under the pressure of French political shenanigans. The EUR/USD gets comfortable below the 1.07 level and the downside pressure will likely mount from now to the weekly close as many investors will probably chose to exit their long euro exposure before the first round of the legislative election that’s due this weekend in France (and which will likely confirm the French preference for Marine Le Pen’s party). Sentiment data due this morning from the Eurozone could also put numbers on the European political worries.
Across the Channel, the British pound also comes under pressure. Cable cleared important technical supports yesterday as it slid below the 100 and 50-DMAs and below the major 38.2% Fibonacci retracement on April to June rally, meaning that the pair has now stepped into the medium-term bearish consolidation zone and is vulnerable to a further fall against the US dollar. The next support zone sits at 1.2560/80, the zone that shelters the 200-DMA and the 50% retracement. We could see the pound bears take aim at this range given that the general election in the UK is approaching. There is not much doubt about a Torie washout. This being said, there is a problem that the FT summarizes very well in just one sentence: Labour and the Conservatives are on course to register their lowest combined vote share in a century, according to pre-election polls. The latter could leave the country with a lot of political uncertainties moving forward.
Far, far away from home, the Australian dollar is among rare major currencies that challenge the dollar’s strength, after the Australian inflation hit 4% in May, leaving the RBA doves with no more energy to fly. But overall, the weakness in euro, pound and yen sent the US Dollar Index to the highest levels since the beginning of May, and expect more inflows into the greenback before the French election weekend.
One thing that could derail the US dollar’s positive trajectory this week is economic data. Due today, the US will reveal its latest GDP update, and tomorrow we will have a look at the core PCE – the Federal Reserve’s (Fed) favorite gauge of inflation. What the Fed doves want to see is reasonably softer economic growth combined with softening inflation. The risk is seeing a softening growth with an insufficient retreat in inflation. Good news is that the inflation component in the GDP report won’t matter much as inflation has started to ease after an early uptick in Q1, so we won’t have the full picture to speculate on new Fed scenarios before tomorrow’s PCE release. In all cases, rising bets that the Fed could cut rates by 300bp in the next nine months is overdone unless a big, big problem emerges in the US economy.
In equities and bonds, the US 2-year yield was slightly higher yesterday, the 5-year and 10-year yields rose to the highest levels in two weeks despite a good 5-year bond auction as the rising Japanese yields rose anxiety among bond investors, but not among stock buyers. The S&P 500 and Nasdaq closed slightly higher on Wednesday thanks to a late rally, as Amazon (NASDAQ:AMZN) hit a record high following a 3.9% rally and reached the $2 trillion mark in terms of market cap for the very first time after announcing its plans to launch a Temu-like discount section that ships goods directly from China. Temu’s owner PDD plunged below its 50-DMA on the news. Rivian (NASDAQ:RIVN) rose 23% after Volkswagen (ETR:VOWG_p) said it will invest $5bn to a joint venture to produce the next generation EVs with the struggling Rivian, while Micron (NASDAQ:MU) fell 8% in late trading despite better-than-expected earnings and revenue, because the revenue forecast for the current quarter just met analyst expectations of $7.6bn for the current quarter. Yes, anything less than fantastic is not good enough when your share price got multiplied by three in just about 18 months. Finally, FedEx (NYSE:FDX) jumped 15% and Novo Nordisk (NYSE:NVO) – the biggest European company that sells weight-loss drugs – hit a fresh record after announcing that it could finally got the approval from Chinese authorities to sell its drugs to the Chinese (who wouldn’t need them if they stuck to their own delicious diet)