An electronic board showing the rate of the Japanese yen versus foreign exchange currencies of the US dollar, euro and the pound in Tokyo on 28 June 2023. AFP.
An electronic board showing the rate of the Japanese yen versus foreign exchange currencies of the US dollar, euro and the pound in Tokyo on 28 June 2023. AFP.
USD weakness delayed:
The USD weakness that we envisaged to happen by mid-2023 is delayed, as resilient US data pushed out expectations of a US recession.
Source: Bloomberg, Bank of Singapore. Latest data as of 30 June 2023.
The lack of durable trends over the past few months is keeping currency volatility muted. It is telling that EURUSD remains wedged within the 1.05-1.11 range. Inflation returning to the central bank's target means the Swiss National Bank (SNB) is likely to aim for a stable rather than stronger CHF vs EUR.
Market expectations for a meaningful deceleration in inflation and for growth to remain slow but non-recessionary in 2H23 have kept the environment friendly for risk assets, reinforcing a lower volatility backdrop. It has become much tougher to pick lasting currency themes with major central banks slowing the pace of rate hikes and becoming more data dependent. It is probably better to assume, for now, that currency trends will be short-lived and volatility muted. However, it would be unusual that such narrow ranges can hold for very long.
We stay patient with our weaker USD view over the medium term, awaiting greater conviction that the Federal Reserve (Fed) is going to pivot dovish or a turn in China/Europe data for the better.
GBP pounding above its weight:
GBP has had a good run in the first half of 2023, as: i) better UK activity data and sticky inflation prodded the Bank of England (BoE) to turn more hawkish and ii) post-Brexit tensions between the UK and the EU eased. The question now is whether the GBP can continue pounding above its weight. With the UK rate markets already pricing about 125bp of monetary tightening until the end of 2023 from the current 5.0%, we believe many positives have been priced into the GBP. The UK economy is now facing a cliff-edge moment, as the surge in short-end yields starts to filter into the housing sector dependent on short-dated mortgages. BoE is at risk of under-delivering relative to hawkish market pricing. The battle between high yields and stagflation fears is set to intensify, keeping us neutral-to-cautious rather than bullish on the GBP outlook.
JPY back on intervention watch:
There was a clear policy divergence between the BoJ and G3 central banks, which led to JPY being the weakest amongst the G10 currencies in 1H23. Despite the JPY being stymied by the BoJ, the medium-term drivers for a stronger JPY remain intact. The risk of actual currency intervention will grow as USDJPY approaches 145, a level at which last year’s actual intervention began.
Currency intervention could produce a bit of a squeeze. But more impact is likely if intervention is combined with a hawkish BoJ tilt through a tweak to the yield curve control. With the immediate inflation outlook likely to be upgraded at the 27-28 July BoJ meeting, the market will likely turn increasingly wary of chasing USDJPY still higher.
Rising pushback against CNY depreciation:
China central bank’s USDCNY fixing is starting to signal a meaningful preference to lean against CNY weakness. CNY weakening is likely to slow and become choppier amid increasing pushback from policymakers.
China’s domestic demand has been surprisingly difficult to revive, and this will keep the authorities on an easing bias. Incremental policy measures continue to roll out, but any significant policy recalibration will await the Politburo meeting in late July. Unless backed by fiscal stimulus, further monetary easing (such as further rate cuts or reserve requirement ratio cuts) could be a positive for China equities, but negative for CNY.
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