The Japanese Yen Will Likely Remain Weak for Months to Come

Economic

Forex

Summary:

The Japanese yen has been steadily depreciating since the beginning of the year, thanks in part to the delayed prospect of rate cuts by the US Federal Reserve and the strength of the US economy...

The Japanese yen has been steadily depreciating since the beginning of the year, thanks in part to the delayed prospect of rate cuts by the US Federal Reserve and the strength of the US economy. Goldman Sachs Research expects the yen to remain at or above 150 to the dollar over a 12-month horizon. In late April, the yen hit 157.8 to the dollar, a level not seen since 1990. On April 29 and May 2, Japan's finance ministry made two apparent interventions in the foreign exchange markets, selling dollars to shore up its currency.

We spoke to Goldman Sachs Research economist Tomohiro Ota and senior currency strategist Michael Cahill about the yen's slide and its implications for Japanese central banking policy and its economy.

What has driven the decline of the yen this year?

Cahill: First and foremost, it's the macro environment that is weighing on the yen. The yen tends to appreciate when recession risk is high — when yields are lower, and people are worried about growth. But we've had the opposite of that recently. We've seen surprisingly resilient growth, especially in the US, which has come despite the Fed keeping its rates high. Instead of having high recession risk, we're tracking US growth at around 3% despite high yields. That combination is weighing on the yen.

Ota: Apart from those big structural factors, there was also a short-term event that may have triggered additional depreciation in the last couple of weeks. After the Bank of Japan held its monetary policy meeting in April, it sent two signals: one, that it does not react directly to the FX markets, and two, that its primary policy target is sustainable inflation. To the BOJ, the dollar-yen rate matters only when currency fluctuations have some impact on reaching their target.

What about individual Japanese people investing in foreign securities?

Cahill: It's hard to gauge the impact of this on foreign exchange. One thing we can say, with a longer-term perspective on yen depreciation, is that in US dollar terms, it has been much more attractive for Japan-based investors to invest abroad, on an unhedged basis, than for foreign investors to invest in Japan on an unhedged basis. Part of what makes it attractive is that, even though yen yields have risen, they've been very low compared to the rise in other markets, especially the US. That's a big reason why the yen has been more responsive to US yields in particular.

Ota: Another aspect of cross-border cash flows is that we've had an extension of a tax benefit for retail investors, in a scheme that allows investment in securities. Through it, many retail investors reportedly decided to invest in foreign equities more than before, which creates a net outflow to other markets, although it is difficult to know exactly how much this affects the yen.

The Japanese Yen Will Likely Remain Weak for Months to Come_1

Is there a line in the sand for the BOJ — a threshold for yen depreciation that policymakers will defend?

Cahill: We've found out that the authorities are much more sensitive to the pace of depreciation and to disjointed moves that are out of line with other market fundamentals. That is also what matters economically. I'd be surprised if they have a long-term target of any kind.

In March, the BOJ ended its negative interest rate policy, raising borrowing costs for the first time since 2007. It also removed the cap on 10-year Japanese government bonds. How has that filtered through the FX market since? And how has that policy shift filtered through Japan's economy?

Ota: The consensus view is that there has been no significant impact on the Japanese economy. The rate hike was only 10 basis points, which was a minimal increase. And in its March meeting, the BOJ announced that they will continue buying the same volume of Japanese government bonds every month, so it didn't signal a move to quantitative tightening. They maintained that stance after their April meeting as well.

Cahill: And on the FX side — FX is a relative game. Even as we had a rate increase in Japan, we've also been pricing out rate cuts around the world. In the US, for example, we've moved to pricing in only two rate cuts this year. In effect, that has made it so that the BOJ's movements barely register. The other important thing is that they described their rate hike as exiting their extraordinary easing policies, not as the launch of a big tightening campaign.

When might the BOJ raise interest rates again?

Ota: The market consensus now is that the BOJ will raise its policy rate again in September or October. Some economists expect a July hike, but in the most recent survey, the consensus lies with September or October. We expect the next hike to come in October.

What is your take on the BOJ's terminal rate? What's a simple way of understanding that idea, and why is it important for investors?

Ota: Japan is now at a crossroads. We've been in a deflationary environment for more than two decades, but the BOJ is now saying that sustainable inflation is their base case scenario. We also think that the Japanese economy has a good chance of getting out of the so-called deflation trap. In that case, near-zero interest rates are not justifiable. The terminal rate is where the policy rate is expected to peak during the business cycle. Right now, the consensus is that Japan's policy rate will peak around 0.75%. But we think it could go as high as 1.5%. If households and firms become convinced that higher inflation is here to stay, that will change pricing and spending behaviour. In turn, the BOJ should be able to raise the policy rate further without restricting the economy too much. This matters for investors trying to gauge how the market (and the economy) will respond to rate hikes.

How might the BOJ react to further yen weakness — or will it?

Ota: Although we expect the next rate hike to come in October, there is a low bar for it to come somewhat earlier. That's because the next hike is expected to be another relatively small one — 15 basis points this time. But we do not expect the BOJ to cite yen weakness as the primary reason for raising the policy rate.

Cahill: If the yen weakens enough to impact the inflation outlook, that could in principle lead to faster rate hikes from the BOJ. In fact, the BOJ has said that exchange rate fluctuations might have a bigger impact on price-setting behaviour right now. But keep in mind that a modestly weaker yen would help the BOJ reach its inflation target. And, importantly, Japan has more targeted tools to deal with exchange rate volatility that looks out of step with fundamentals. With about $1 trillion in foreign exchange reserves, Japan is one of the largest reserve managers in the world. So the ministry of finance has plenty of capacity to intervene in the FX market if it needs to. But there are limits on how effectively authorities can manage the exchange rate without taking more decisive action that could have unwelcome side effects.

What is Goldman Sachs Research's outlook for GDP growth in the coming 12 months, and how has that shifted since the start of the year?

Ota: Currently our GDP growth forecast for the calendar year 2024 is 0.5%. This is lower than our initial forecast in November last year of 1.5%. The main reason for that downgrade is a temporary drop in consumption in the January-March period, reflecting the fact that some Japanese automobile companies had to close their production lines because of problems with the quality assurance process. But that is a temporary issue and doesn't change our macro narrative. Following this brief setback, we expect positive growth for the rest of the year, including a temporary consumption boost from an income tax cut over the summer.

What is your outlook for the yen over the next six and 12 months, and why?

Cahill: We expect the yen to remain around current weak levels over the next 6-12 months. The bottom line is that the macro environment should continue to weigh on this safe-haven currency, and the Fed cuts (and BOJ hikes) that we expect probably won't provide that much support. We think recession risk remains fairly low, and there is not much room for 10-year US yields to rally, which is what would typically strengthen the yen. The yen could weaken further if the US economy proves even more resilient than we expect, and if the Fed delivers even fewer rate cuts down the line.

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Samantha Luan

Economic

Commodity

Dynamics in the global oil markets have shown little change over the past couple of weeks with pessimism still high and hedge funds still leaning towards the short side of the market. Over the past week, Brent prices remained range-bound in the $83.45-83.60/bbl range with the prolonged sideways price movement pushing volatility lower.

The realized annualized 30-trading-day front-month Brent volatility clocked in at just 16.9% at settlement on 20 May, a 2.1 ppt w/w reduction while the 10-trading-day volatility measure came in 7.4 ppt w/w lower at just 12.5%. Front-month Brent settled at $83.71/bbl on 20 May, good for a 0.35/bbl w/w increase but considerably lower than the $1.44/bbl increase predicted by Standard Chartered’s machine-learning oil price modeling tool, SCORPIO.

Oil markets continue to be lackluster compared with the strength displayed by metals and gas markets. StanChart has predicted that the bearish sentiment coupled with low market volatility are likely to persist until OPEC+ announces its new policy during its next meeting scheduled for early June. However, StanChart notes that the exact timing of that unilateral announcement is uncertain because voluntary cuts are outside the scope of the OPEC+ ministerial meeting. The experts have predicted that positive developments by OPEC+ could trigger another oil price rally.

In contrast to oil markets, natural gas markets have turned much more positive in recent weeks thanks in large part to improved supply/demand balances. Henry Hub gas prices are up 55.2% over the past 30 days to $2.78/MMBtu while TFF gas has jumped 42.0% from its February lows to change hands at €34.6/MWh. An early heatwave in Texas has helped make U.S. natural gas

the strongest of the major commodities for a second successive week while the positive sentiment in Europe’s gas markets is being driven by concerns about prolonged maintenance outages in Norway, with the Troll field and Kollsnes processing plant still offline.

Pipeline gas supplies to Europe hit a low of 178.9 mcm/day on Tuesday, the lowest since September while the previously huge inventory buildup has slowed down.

The latest data by Gas Infrastructure Europe (GIE) shows that EU gas inventories stood at 77.88 billion cubic meters (bcm), good for a 2.11 bcm y/y increase. However, it’s important to note that whereas inventories are still 16.83 bcm above the five-year average, that surplus is being steadily eroded, having fallen on 32 of the past 34 days for a cumulative decrease of 5.5 bcm over the timeframe. Last week, the continent’s gas inventories increased by 2.28 bcm,

lagging the 2.61 bcm increase over the same period last year and the five-year average

of 2.67 bcm. The muted pace of inventory increases coupled with evidence of strong LNG demand in Asia have been supporting the ongoing natural gas rally.

However, it’s going to be interesting to see if the gas rally will hold, with predictions that Europe’s gas flows will gradually return to normal by the end of May. Meanwhile, warmer weather forecast until the end of May has dampened gas demand, resulting in European gas storage facilities surpassing 67% capacity.

Energy Stocks Giving Up Gains

The end of the early-year oil price rally has forced energy stocks to give up some gains. The sector has lost 5% over the past six weeks bringing its gains in the year-to-date to 11.46%, slightly below the 11.56% return by the S&P 500. The energy sector has slipped several spots in sector rankings and is now the 5th best-performing sector behind Communication Services (21.32%), Information Technology (16.60%), Utilities(14.51%) and Financials (11.80%). Only the Real Estate sector is in the red with a -4.21% return so far in the current year.

That said, Wall Street largely remains bullish on oil and gas stocks. A week ago, Oppenheimer Asset Management revealed it holds a favorable outlook on the equities market, especially the Energy and Consumer Discretionary sector.

“We remain positive on equities” as “92% (459 firms) of the companies in the S&P 500 index having reported Q1 results, earnings are exceeding expectations. Profits are up 5.5% overall on the back of 3.8% revenue growth,” Oppenheimer stated in an investor note. “Eight of the 11 sectors are showing positive earnings growth, with six up at double digit rates. These include communication services (+42%), consumer discretionary (+39%), utilities (+31%), information technology (+14%), financials (+11%) and real estate (+11%),” the investment firm added.

Despite posting another disappointing earnings season, Oppenheimer has indicated that Energy likely has further upside though not necessarily in a straight line.

Meanwhile, we recently highlighted that oil and gas stocks are likely to continue outperforming the market regardless of whether Biden or Trump ascends into the Oval Office come 2025, though clean energy investments could face considerable risk if Trump wins.

Source：oilprice

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Glendon

Economic

Gold prices have been on a rollercoaster ride in recent weeks, defying expectations and leaving investors scratching their heads. The price of gold is hovering around $2,350 per ounce, down slightly from yesterday's close. This article delves into the technical analysis of gold, explores relevant news impacting its price, and examines whether a potential rebound is on the horizon.

Technical Analysis: A Bullish Battle on the Charts

While the current price movement might suggest a bearish trend, technical indicators tell a slightly different story. Here's a closer look:

Relative Strength Index (RSI): The RSI for gold is currently at 48, indicating that the market is neither overbought nor oversold. This suggests potential room for upward movement if the right catalysts emerge.

Moving Averages: The 50-day and 200-day moving averages are currently converging, hinting at a possible price direction shift in the near future. A breakout above these averages could signal a bullish trend.

Support and Resistance Levels: The key support level for gold is around $2,320, and the resistance level sits at $2,380. A break above the resistance could trigger further buying momentum.

However, it's important to acknowledge the presence of some bearish indicators as well:

Failed Breakout: A recent attempt to break above the $2,400 level failed, suggesting a lack of buying pressure at that price point.

News Roundup: Geopolitical Tensions and US Economic Data

Geopolitical tensions and economic data are two major factors influencing the price of gold. Here are some key news items to consider:

No Major Escalation: Despite ongoing concerns, there haven't been any significant escalations in geopolitical tensions recently. This could be contributing to the current lull in gold prices, as investors seek less safe-haven assets.

Mixed US Economic Data: Recent economic data from the US has been mixed. While a stronger-than-expected jobs report might indicate a robust economy, concerns about inflation remain. This uncertainty could be keeping gold prices somewhat stable.

Federal Reserve Policy: The upcoming Federal Open Market Committee (FOMC) meeting in June will be closely watched. If the Fed signals a more aggressive approach to raising interest rates, it could strengthen the US Dollar and put downward pressure on gold prices.

Expert Opinions: Divergent Views on Gold's Future

Financial experts are divided on the future trajectory of gold prices. Some analysts believe a correction is still possible, with prices potentially dipping below $2,300 in the short term. Others are more optimistic, predicting a rebound towards $2,400 or even higher, fueled by potential geopolitical turmoil or a resurgence of inflation fears.

What to Watch Out For

Investors should keep a close eye on the following developments:

Geopolitical Developments: Any significant escalation in global tensions could trigger a flight to safety, boosting gold prices.

US Inflation Data: Upcoming inflation data releases in the US will be crucial in determining the Fed's monetary policy decisions, which could impact the USD and subsequently influence gold prices.

Technical Chart Signals: A decisive break above or below key support and resistance levels on the gold price chart will provide clearer technical direction.

Conclusion: A Cautious Outlook with Potential for Change

The current outlook for gold prices is uncertain. While technical analysis hints at a possible rebound, geopolitical and economic factors will play a significant role. Investors should conduct thorough research, consider expert opinions, and monitor the evolving news landscape before making any investment decisions related to gold. Remember, gold can be a valuable asset for portfolio diversification, but it's essential to understand the risks involved.

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Samantha Luan

Economic

Central Bank

New Zealand central bank Governor Adrian Orr downplayed the chances of another interest rate hike, saying the bank would only tighten policy further if it felt it needed to contain inflation expectations.

“Another rate hike would only be meaningful if we thought inflation expectations were getting away on us again, starting to rise because of the persistence of actual inflation,” Orr said in an interview on Bloomberg Television Thursday in Wellington. “We are confident that we will get inflation down to the 1-3% band, we'd just like to make sure we get there soon without risking another blowout in expectations.”

The Reserve Bank held its benchmark rate at 5.5% yesterday but surprised markets by saying it considered a hike. The RBNZ also raised the forward track for the cash rate, signaling increased risk of further tightening.

Orr was asked whether another rate hike would be effective given inflation is elevated in areas of the economy that are less sensitive to monetary policy, such as insurance costs and local government taxes.

“We know that forward-looking inflation is heavily influenced by the current level of inflation, so that's our main concern,” he said.

Two-year ahead inflation expectations declined to 2.33% in the second quarter from 2.5% in the first, according to a survey of businesses published by the RBNZ this month. That was the lowest reading in almost three years. A measure of household expectations was more elevated at 3%.

The central bank aims to keep inflation around the 2% midpoint of its 1-3% target band. Inflation eased to 4% in the first quarter, but a measure of domestic price pressures barely slowed to 5.8%.

The RBNZ has said it has limited tolerance for further upside inflation surprises. But Orr said its patience has not yet run out and policy would not hinge on a single data point, such as the second-quarter inflation print due in July.

“What we are showing is that we've got a lot of patience,” he said, adding the RBNZ's central projection is to keep the Official Cash Rate at 5.5% into next year.

“We believe that will have inflation back down within the band, and at that point we can start thinking about normalizing interest rates,” he said.

Orr said the sticky prices the bank has talked about “have been well signaled and they are in our inflation projections.”

“So it'd have to be something over and above that again to really surprise us,” he said. “We think the risks are balanced.”

Source: Bloomberg

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FastBull Featured

Data Interpretation

On May 22nd, local time, the National Association of Realtors announced home sales data in April:

The total number of April home sales came in at 4.14 million, compared to an expectation of 4.21 million and the previous 4.22 million.

The April home sales dipped 1.9% from a month ago, compared to an expected increase of 0.8% and the previous decrease of 3.7%.

This data has slowed for two months. At the end of April, total housing inventory reached 1.21 million, up 9% MoM and 16.3% YoY. Unsold inventory sits at a 3.5-month supply at the current sales pace, up from 3.2 months in March and 3.0 months in April 2023. For homes priced $1 million or more, inventory and sales increased by 34% and 40%, respectively, from a year ago.

The median existing-home price was $407,600 in April, up 5.7% YoY, which was also the highest level in any April data since 1999 when records began.

Home sales changed little overall, but the upper-end market is experiencing a sizable gain due to more supply coming onto the market. Properties typically remained on the market for 26 days in April, down from 33 days in March but up from 22 days in April 2023, indicating that market demand for homes remains strong. Moreover, home prices hit a new record high in April, but the rate of price increases should be slower as home inventories continue to grow.

Furthermore, the release of the April CPI data made the slowdown in housing inflation the highlight of the report. At the same time, subsequent statements by officials made several references to it, which caused the market to focus on it for evidence of a continued slowdown in housing inflation. This allowed the data to be laced with a strong market sentiment, so its impact naturally expanded.

Home sales decline for the second month gives hopes of a continuous decline in housing inflation. Additionally, market expectations of interest rate cuts were boosted, which caused the USDX to fall from highs during the U.S. session.

U.S. April Existing Home Sales

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Alex

Economic

German wages rose sharply at the start of 2024 — dealing a blow to the European Central Bank as it decides whether inflation is slowing enough to reduce interest rates.

Negotiated pay increased 6.2% in the first quarter, the Bundesbank said Wednesday in its monthly report. That exceeded estimates by analysts at Bloomberg Economics, Citi and Morgan Stanley, though the figure includes one-off payments to compensate workers for the surging cost of living.

The data come just a day before a highly anticipated reading for the 20-nation euro zone as a whole. The worry is that stronger-than-expected salary gains in Europe’s largest economy mean inflation will take longer to return to the 2% target.

“Overall, there are still risks to the fundamental disinflation process,” the Bundesbank said. “Wage growth has recently been stronger than expected. As a result, still-high price pressure on services in particular could persist for longer.”

ECB officials have left little doubt that borrowing costs will be lowered on June 6, though they won’t commit to a path beyond that and say they’ll be guided by data. They currently see inflation returning to their goal in the second half of 2025 and will publish updated projections in just over two weeks.

But the newest data out of Germany mean that the euro-zone wide figure for negotiated pay will show an acceleration, increasing the risk that officials deliver less easing after June than currently predicted, said Tomasz Wieladek, an economist at T. Rowe Price.

“This will be a significant challenge to the idea that the ECB will deliver sequential rate cuts,” he said in a statement. “Wage data will allow the ECB to cut significantly eventually. But in the meantime, until the point when the data supports additional cuts, the ECB will need to be patient.”

Greg Fuzesi of JPMorgan took a similar view, warning that “the data could remind some policymakers of the difficulty of the ‘last mile,” with recent productivity disappointments also playing into this.”

Consumer-price growth in Germany will probably pick up in May and fluctuate around a slightly higher level in the coming months, the Bundesbank said. At the same time, the economy is set to gather pace as higher pay underpins consumption and confidence in the struggling manufacturing sector returns.

German Growth

Gross domestic product is likely to edge higher in the second quarter after it unexpectedly expanded between January and March, it said.

The Bundesbank warned that, for now, demand in manufacturing and construction continues to be weak — reflecting subdued global trade, higher borrowing costs and increased policy uncertainty. With a sustained industrial revival requiring a broad-based advance in new orders, improving sentiment “probably won’t be reflected in a noticeable increase in production momentum until the second half of the year,” it said.

Service providers, though, are likely to continue their recovery.

“Rising real disposable household incomes are likely to gain the upper hand over consumer uncertainty,” the Bundesbank said. “Further gains in purchasing power are to be expected as the labor market is likely to remain robust and wages will continue to rise sharply.”

Source：Bloomberg

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Alex

Economic

Forex

The Services PMI and the Bank of Japan

Preliminary private sector PMI numbers for May will put the USD/JPY in focus.

Economists forecast the Jibun Bank Manufacturing PMI to rise from 49.6 to 49.7 in May. Moreover, economists expect the Jibun Bank Services PMI to fall from 54.3 to 53.8.

The Jibun Bank Services PMI will likely impact buyer demand for the Japanese Yen. Following the Spring wage hikes, the BoJ hopes the services sector can fuel demand-driven inflation and allow for a higher interest rate environment. Furthermore, the services sector contributes over 60% to the Japanese economy.

However, investors must consider the sub-components, including input prices, employment, and new orders.

Beyond the numbers, investors should monitor for Bank of Japan commentary. Views on inflation, the economic outlook, and the timing for an interest rate hike could move the dial. Yen weakness continues to leave the BoJ under pressure to fuel expectations of a summer rate hike.

US Economic Calendar: The Services Sector, the Labor Market, and the Fed

Later in the Thursday session, US jobless claims data and preliminary private sector PMIs warrant investor attention.

Economists forecast initial jobless claims to fall from 222k to 220k in the week ending May 18. Tighter labor market conditions could support wage growth and increase disposable income. Upward trends in disposable income may fuel consumer spending and demand-driven inflation. Moreover, tighter labor market conditions could leave a Fed interest rate hike on the table.

However, the S&P Global Services PMI could impact the Fed rate path more. The services sector contributes over 70% to the US economy, with housing services inflation a focal point.

Economists forecast the S&P Global Services PMI to remain unchanged at 51.3. Better-than-expected figures may fuel speculation about a Fed rate hike. However, investors should consider the sub-components, including prices and employment.

Investors should also track FOMC member reaction to the stats after the more hawkish-than-expected FOMC Meeting Minutes.

Short-term Forecast

Near-term trends for the USD/JPY will hinge on the Services PMIs and views on monetary policy. Better-than-expected US PMI numbers could raise investor bets on a Fed interest rate hike and tilt monetary policy divergence toward the US dollar.

USD/JPY Price Action

Daily Chart

USD/JPY Forecast: Services PMIs to Impact BoJ and Fed Rate Hike Bets_1

The USD/JPY held comfortably above the 50-day and 200-day EMAs, affirming the bullish price signals.

A USD/JPY breakout from the 157 handle would support a move to the 158 handle. A return to the 158 handle could give the bulls a run at the April 29 high of 160.209.

On Thursday (May 22), Services PMIs and US labor market data need consideration.

Alternatively, a USD/JPY fall through the 155 handle could give the bears a run at the 50-day EMA. A break below the 50-day EMA could signal a drop toward the 151.685 support level.

The 14-day RSI at 59.57 suggests a USD/JPY return to the April 29 high of 160.209 before entering overbought territory.