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FX

Japan needs more than verbal intervention to turn Yen sentiment around

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  • JPY: In FX markets, Yen currently commands the greatest attention amid renewed depreciation backed by powerful momentum. The moves in Yen have also brought FX to the attention of Japanese authorities with the Japanese government last week convening a tripartite meeting of the MoF, the FSA and BoJ followed by Vice-Minister of Finance Masato Kanda commenting that Yen depreciation has “come against the backdrop of speculative moves and is clearly excessive”. He further adds that if these kinds of moves continue, “the authorities are ready to take the necessary steps without ruling out any possible measure”. More verbal intervention follows with BoJ Governor Kuroda on the wires following the three-way meeting, saying that “a two to three yen move against the dollar in a single day is very sudden.” Chief Cabinet Secretary Hirokazu Matsuno also reiterates his stance that the recent moves in Yen have been excessive and all options remain on the table. So what are the possible measures that Vice-Minister of Finance Masato Kanda may be alluding to?
  • JPY: Unilateral intervention - cannot be ruled out if USDJPY heads towards 149 – 150. But even if the US Treasury tolerates forex intervention by Japan’s MoF, such intervention would probably not stem the Yen depreciation tide for very long while the BoJ maintains its ultra-dovish stance in contrast to policy elsewhere. Without accompanying adjustments in BoJ monetary policy, the impact is likely to be short-lived. A fundamental shift in BoJ monetary policy – with underlying inflation in Japan of only c1%, and continued low growth in wages, it is highly unlikely that Governor Kuroda will exit negative rates in Japan (NIRP) anytime soon and certainly not while he remains in office (until April 2023). The BoJ though, may opt to fine tune policy which need not contradict Governor Kuroda’s overall dovish policy stance but could provide a more effective solution if accompanied by FX intervention. However, Governor Kuroda refuses to entertain any policy tweaks for now as he continues to maintain that USD appreciation is an across-the-board phenomenon and not just against JPY. He also believes that to stop JPY from weakening would require hikes in interest rates large enough to cause significant damage to the Japanese economy. Fiscal discipline by the Japanese government – this would likely help to cap Yen weakness but also looks unlikely as Japan PM Kishida has already indicated fiscal support for low income households battling higher energy costs. Indeed, Citi analysts expect Japan to produce the largest ever initial budget next FY — appropriation requests, which had an August 31 cutoff, currently amount to ¥110trn while the level excluding the JGB-related budget is a record ¥83.1trn. Opening up Japan’s borders to foreign tourists – a “low hanging fruit” that could bring back retail demand for Yen but depends on Japan’s Covid policy. In short, either the measures that may be implemented (FX intervention) are likely to prove ineffective or measures that could prove effective are unlikely to be implemented so soon. It therefore likely falls on the US and the Federal Reserve as to when it makes a dovish pivot – for USD to fall and reverse the trend of Yen weakness.  
 

China - policy support needed as both domestic and external sectors underperform

  • CNY: China’s trade falters in August as demand wanes domestically and abroad. Export growth slows to 7.1%y/y, much lower than 18.0%y/y in July and consensus forecast for 13.0%y/y while import growth is up 0.3%y/y in August, also undershooting expectations for +1.1%y/y and slower than the 2.3%y/y gain in July. A higher base from a year earlier contributes in part to the slowdown in trade and is likely to remain a drag through the expected slowdown in global demand. The data shows China’s trade surplus shrinking to $79bn in August from a record of $101bn in July, contributing to a larger than expected $50bn fall off in FX reserves in August. The slowdown in exports adds further impetus for additional policy to support the economy, which is likely to come after the Party Congress (CPC), scheduled to begin on October 16.
  • CNY: China’s consumer and producer price inflation fall further in August amid economic weakness - China’s consumer price index rises 2.5%y/y in August, down from 2.7%y/y in July and below expectations for a 2.8%y/y increase. Meanwhile, the producer price index (PPI) rises 2.3%y/y in the month, also down from a rise of 4.2%y/y in July and misses expectations for a 3%y/y rise. The inflation data reflects weak domestic demand and shows no hurdles for further easing to stabilize economic growth.
  • CNY: New TSF beats expectations but does not reflect genuine credit demand – new TSF beat market expectation, thanks to the sizable improvement in off-balance-sheet financing. New TSF stands at RMB2.43trn in August (vs RMB756bn in July and RMB2.99trn in August 2021), well above market expectations (Citi/Mkt: RMB1.9/2.1trn). However, this is offset by weaker than expected new loans and widening growth gap in M2 vs M1 and TSF/loans - M2 growth continues to accelerate, by 0.2 ppt to 12.2%YoY, in line with market consensus (Citi/Mkt: 12/12.2%YoY) but M1 growth decelerates by 0.6 ppt to 6.1%YoY. The M2-M1 divergence may be attributable to the broad-based weak expectations as corporates prefer time deposits over demand deposits even in this setting of lower interest rates. New RMB loans also underperform consensus again, largely due to the weakness in household sector. New loans post RMB 1.25trn in August, up RMB 30bn YoY, but still below market expectations (Citi/Mkt: RMB1.4/1.5trn). Looking ahead, there appears to be room for further interest rate reductions and a reliance on PBoC’s structural tools such as relending to bring back credit demand.
 

Canada August jobs data shows some loosening in still-tight labor market

  • CAD: Canadian employment falls for the third consecutive month, declining by 39.7k jobs in August. Contrary to declines in employment in June and July, the unemployment rate also rises in August, to 5.4% from 4.9% in July with the participation rate rising only moderately to 64.8%. Meanwhile, average wages of permanent employees rise 5.6%YoY. The data overall suggests some of the decline in employment could be due to moderating demand as opposed to short labor supply and the report therefore looks to be a more convincing signal of potential loosening in the labor market. In particular, the substantial rise in the unemployment rate in August with only a modest increase in participation looks to be a clearer sign of moderating labor demand.
  • CAD: But while further weakening in Canadian activity data could lead the BoC to signal a pause in rate hikes at an upcoming meeting, it will ultimately be inflation data that determines the path of rate hikes. The continued climb in wages in the August labor force survey would suggest that even with some modest loosening, the labor market overall remains tight. Therefore, for now, Citi analysts continue to pencil in a 50bp hike in October by the BoC followed by a 25bp hike in December for policy rates to reach their peak at 4%.
 
Week Ahead
  • USD: US August CPI MoM – Citi: -0.1%, median: -0.1%, prior: 0.0%; CPI YoY – Citi: 8.0%, median: 8.1%, prior: 8.5%; CPI ex Food, Energy MoM – Citi: 0.4%, median: 0.3%, prior: 0.3%; CPI ex Food, Energy YoY – Citi: 6.1%, median: 6.1%, prior: 5.9% - in the last key CPI release ahead of the September FOMC meeting, it will be particularly important for this release to assess details underlying another “softer” core inflation print, as there are notable downside risks relative to expectations. However, the data may not be enough to convince the Fed of sustainably slowing inflation which would leave another 75bp hike on the table for the Sep 21 FOMC meeting.
  • USD: US August PPI Final Demand MoM – Citi: 0.0%, median: -0.1%, prior: -0.5%; PPI Final Demand YoY – Citi: 8.9%, median: 8.8%, prior: 9.8%; PPI ex Food, Energy MoM – Citi: 0.5%, median: 0.3%, prior: 0.2%; PPI ex Food, Energy YoY – Citi: 7.2%, median: 7.1%, prior: 7.6%; PPI ex Food, Energy, Trade Services MoM – Citi: 0.2%, median: 0.3%, prior: 0.2%; PPI ex Food, Energy, Trade Services YoY – Citi: 5.6%, median: 5.5%, prior: 5.8% - there is likely to be slowing in core goods prices as commodity prices fall, supply disruptions ease and goods demand wanes. However, some services prices will be key to watch for implications for PCE inflation.
  • USD: University of Michigan September Sentiment – Citi: 57.2, median: 59.6, prior: 58.2; 1Yr Inflation Expectations – Citi: 4.7%, median: NA, prior: 4.8% - Citi analysts expect the continued decline in retail gas prices presents some downside risk to 1Yr inflation expectations. However, there are underappreciated upside risks to 5-10Yr inflation expectations as shorter-term expectations have been elevated for over a year.
  • EUR: ECB: what’s next? – Bloomberg reports ECB hawks and doves remain open to another 75bp rate hike in October but will the hawks go further? Leading hawk Isabel Schnabel will speak on Monday (albeit only opening remarks), centrist Villeroy on Wednesday. Euro area data this week - German ZEW Expectations, September – Citi Forecast -59.0, Consensus -60.0, Prior -55.3; Current Assessment, September – Citi Forecast -50.0, Consensus -52.1, Prior -47.6; Euro Area ZEW Expectations, September – Citi Forecast -59.0, Prior -54.9.
  • GBP: Postponement of this week’s MPC meeting still leaves UK July GDP, August jobs and CPI for this week. UK GDP is expected to offer a relatively weak start and likely to disappoint MPC forecasts. The jobs release offers perhaps the clearest hawkish risk following the upside surprise in June. Here the key data is regular pay, which is likely to have grown by 5.1% YY. Anything more risks a hawkish surprise. CPI data, by contrast, may fall back in line with MPC’s August forecasts. Citi analysts now see UK CPI likely peaking at 11.6% in October. 
  • NZD: NZ Q2 National Accounts: Citi GDP forecast QoQ; 1.0%, Previous; -0.2% - Citi analysts’ GDP growth forecast of 1.0% is below the RBNZ’s stronger forecast of 1.6%. But there are enough abnormal influences in the Q2 GDP data and lingering concerns about inflation and wages growth for the RBNZ to maintain its current hawkish policy stance for one final +50bp move at the October 5 policy review meeting before the RBNZ moves to a +25bp move at the November 25 meeting for an OCR peak of 3.75%.
  • AUD: Australia August Labor Force: Citi Employment forecast MoM; 35k, Previous; -40.9k; Citi Unemployment Rate forecast MoM; 3.4%, Previous; 3.4%; Citi Participation Rate forecast MoM; 66.5%, Previous; 66.4% - forward indicators of labor demand still point to solid employment growth ahead. The more immediate concern is the labor force participation rate. If participation falls further, it will signal that the labor market is in-fact even tighter than initially expected.

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