EUR
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. But the bank quelled any hawkish excitement by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger hike. At their July meeting the bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries that will need the support the most might have a tough time qualifying. Combined with Italian political concerns, further spread widening looks likely right now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace further stoking recession fears for the Eurozone. As long as data surprises lower and spreads remain high the bias for the EUR remains firmly in bearish territory.
POSSIBLE BULLISH SURPRISES
Geopolitics remains important where any de-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attemptsto avoid a snap election could ease spread widening & support the EUR. Stagflation fears are high, with growth expected to slow with inflation still. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (German Ifo & EU GDP data this week) could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets about their new TPI tool. Any comments about TPI that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia increases gas flows to more regular levels it should ease some energy supply issues.
POSSIBLE BEARISH SURPRISES
Geopolitics remain in focus, any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Growth concerns continue to weigh on the EUR and means any major negative surprises in incoming growth data (German Ifo & EU GDP data this week) could trigger further downside. Spread fragmentation remains in focus, and if the ECB fails to act with big jolts higher in the BTP/ Bund spread it could trigger bearish reactions in the EUR. We've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia decreases gas flows again it should ease some energy supply issues.
BIGGER PICTURE
The fundamental outlook remains bearish for the EUR with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks open up a narrative change for the EUR which will require markets to change their forecasts to reflect higher recession probabilities which should weigh on the EUR.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
BASELINE
The Yen has seen a lot of depreciation this year driven by very negative fundamentals. Yield differentials has by far had the biggest negative impact. With other major central banks starting aggressive hiking cycles, it has lifted yields quite dramatically, which has seen yields like US10Y push considerably higher than 10-year Japanese yields capped at 0.25% by yield curve control. That means dovish monetary policy remains a key negative driver. Despite inflation starting to push higher in Japan, and despite the lessons from other central banks, the BoJ once again stayed very dovish at their July meeting. Even though the JPY is considered a safe haven, inflows has been limited compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities, so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, if US10Y and commodities start reacting more negatively to the currency negative cyclical growth outlook it could ease a lot of the JPY’s pressure and given positioning could see some sizeable upside in the short-term.
POSSIBLE BULLISH SURPRISES
Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation, faster deceleration in US growth) or meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY) could offer decent reprieve for the JPY.
POSSIBLE BEARISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US inflation, better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside.
BIGGER PICTURE
The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y gains ground and as long as the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remains lower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities. It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
FUNDAMENTAL OUTLOOK: WEAK BEARISH
BASELINE
In recent weeks, the persistently high inflation has seen the ECB take a more hawkish turn with the bank hiking rates by 50bsp at their July meeting. But the bank quelled any hawkish excitement by explaining they are frontloading hikes and not signalling a higher terminal rate with their bigger hike. At their July meeting the bank also failed to ease spread fragmentation concerns with their new Transmission Protection Instrument (TPI) as the eligibility criteria means countries that will need the support the most might have a tough time qualifying. Combined with Italian political concerns, further spread widening looks likely right now. Right now, even though policy and spreads are important, the main story and driver for the EUR is the economic outlook. Recent growth data continues to surprise to the downside at a rapid pace further stoking recession fears for the Eurozone. As long as data surprises lower and spreads remain high the bias for the EUR remains firmly in bearish territory.
POSSIBLE BULLISH SURPRISES
Geopolitics remains important where any de-escalation or cease fire in Ukraine would open up a lot of EUR upside. Also keep Italian politics in mind where successful attemptsto avoid a snap election could ease spread widening & support the EUR. Stagflation fears are high, with growth expected to slow with inflation still. Recent PMI data has invigorated recession fears, which means any materially better-than-expected growth data (German Ifo & EU GDP data this week) could spark some relief. Spread fragmentation remains a concern, especially with Italian politics and the ECB’s failed attempt to reassure markets about their new TPI tool. Any comments about TPI that convinces markets it can solve fragmentation issues should be supportive for the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia increases gas flows to more regular levels it should ease some energy supply issues.
POSSIBLE BEARISH SURPRISES
Geopolitics remain in focus, any escalation in the Ukraine war that risks including NATO would be big negative risks. Also keep Italian politics in mind, where any failed attempts to avoid a snap election should add further pressure on the EUR. Growth concerns continue to weigh on the EUR and means any major negative surprises in incoming growth data (German Ifo & EU GDP data this week) could trigger further downside. Spread fragmentation remains in focus, and if the ECB fails to act with big jolts higher in the BTP/ Bund spread it could trigger bearish reactions in the EUR. We've seen a chunky repricing in hike expectations over the past three weeks, and any further lower repricing is expected to weigh on the EUR. Energy concerns are still in focus, which means watching the Nord Stream 1 flows, if Russia decreases gas flows again it should ease some energy supply issues.
BIGGER PICTURE
The fundamental outlook remains bearish for the EUR with recent leading indicators pointing to a much faster economic slowdown than markets had previously expected. The current bearish drivers (geopolitics, stagflation, spread fragmentation, energy supply concerns) far outweigh the positives from a hawkish ECB. Recession risks open up a narrative change for the EUR which will require markets to change their forecasts to reflect higher recession probabilities which should weigh on the EUR.
JPY
FUNDAMENTAL OUTLOOK: BEARISH
BASELINE
The Yen has seen a lot of depreciation this year driven by very negative fundamentals. Yield differentials has by far had the biggest negative impact. With other major central banks starting aggressive hiking cycles, it has lifted yields quite dramatically, which has seen yields like US10Y push considerably higher than 10-year Japanese yields capped at 0.25% by yield curve control. That means dovish monetary policy remains a key negative driver. Despite inflation starting to push higher in Japan, and despite the lessons from other central banks, the BoJ once again stayed very dovish at their July meeting. Even though the JPY is considered a safe haven, inflows has been limited compared to other cycles. The reason is Japan’s current account surplus (a main reason for safe haven appeal) has deteriorated due to the rise in commodity prices. Japan imports the bulk of their commodities, so very high energy prices has added to downside. The BoJ and MoF’s reluctance to intervene to stop the rapid depreciation in the JPY in recent weeks has been noticeable. As long as they just voice their dislike but fail to act, the market will keep testing them. Having said that, if US10Y and commodities start reacting more negatively to the currency negative cyclical growth outlook it could ease a lot of the JPY’s pressure and given positioning could see some sizeable upside in the short-term.
POSSIBLE BULLISH SURPRISES
Catalyst that triggers speculation that the BoJ could drop YCC or hike rates or both (big upside surprises in inflation) could trigger upside in JPY, which means inflation data will be important to keep on the radar. Catalysts that trigger meaningful corrections in US10Y (less hawkish Fed, faster deceleration in US inflation, faster deceleration in US growth) or meaningful bouts of risk off sentiment could trigger bullish reactions from the JPY. Any catalyst that triggers meaningful downside in key commodities like Oil (deteriorating demand outlook, ease in supply shortage) could trigger bullish JPY reactions. Any intervention from the BoJ or MoF to stop JPY depreciation (buying the JPY or giving firm and clear lines in the sand for USDJPY) could offer decent reprieve for the JPY.
POSSIBLE BEARISH SURPRISES
With yield differentials playing such a huge role for the JPY, any catalysts that push US10Y higher (more aggressive Fed, further acceleration in US inflation, better-than-expected US growth data) could trigger further bearish price action for the JPY. Any catalyst that creates further upside in oil prices (further supply concerns, geopolitical tensions) poses downside risks for Japan’s current account surplus and could trigger further bearish reactions in the JPY. Further reluctance from the BoJ and MoF to address the concerning depreciation in the JPY, and further reluctance from the BoJ to pivot away from very dovish policy is a continued negative driver for the JPY to keep on the radar. If the BoJ pushes back against calls for a policy shift despite upside surprise in CPI could trigger further JPY downside.
BIGGER PICTURE
The fundamental outlook remains bearish for the JPY, especially after the BoJ once again stuck to the same overly dovish script at their July meeting. As long as US10Y gains ground and as long as the BoJ stays stubbornly dovish and no push back is made against the JPY weakness from the BoJ or MoF, the bias remains lower. But take note of positioning which means we don’t want to chase the JPY lower and bullish reactions can see outsized upside on big drops in US10Y & commodities. It also means watching incoming CPI data closely as any huge upside surprises could trigger speculation of a possible policy shift.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.