Sunset Market Commentary

Markets

Markets are testing the resolve of Japanese officials. USD/JPY broke through the 160-level which triggered FX interventions at the end of April and early March. The pair set a new nearly 40-yr high above 160.50. Verbal warnings by the Japanese (vice-) finance minister earlier this week don’t result in effective action yet. Japan’s currency chief Kanda said that they are watching forex moves with a high level of urgency. He calls them one-sided and rapid, but didn’t mention “excessive”, which was a trigger point in the past. After his comments, the JPY sell-off just continued. USD/JPY 163 is rumoured to be the new 160. Something tells us that the journey won’t take that long. Japanese officials might be putting their eggs in the US eco update basket which starts this Friday with May PCE deflators and ends next Friday with payrolls. Overall dollar strength is at play as well today as risk sentiment soured during European dealings and going into the US start. The trade-weighted dollar changes hands above 106 for the first time since the end of April with resistance at 106.52 looming. EUR/USD tests the recent lows around 1.0670. From the euro side of the story, this morning’s comments by ECB Rehn might have contributed to some weakness. He aligned with the majority market thinking of 2 additional 25 bps rate cuts this year with the ECB eyeing a 2.25%-2.50% terminal rate. The new French underperformance (both bonds and stocks) going into Sunday’s first round of parliamentary elections could be at play as well.

Today’s core bond sell-off is somewhat at odds with the risk sell-off and USD strength. In the run-up to tomorrow’s first presidential debate between Biden and Trump, US public deficits are taking more and more center stage. The sell-off including underperformance of the long end of the curve could be related to the fact that none of them would really do something about them or on the contrary even engage on some additional fiscal spending. US yields currently add up to 5.5 bps at the very long end (30-yr). German yields add up to 2.5 bps for the longer tenors.

News & Views

The ECB published its biennial report on the progress made towards euro adoption in Bulgaria, the Czech Republic, Hungary, Poland, Romania and Sweden. As EU members they are obliged to adopt the single currency eventually. The ECB said limited progress was made since 2022 and none of them met the criteria to do so yet. Bulgaria came closest, fulfilling all but the price stability criterion. It was the only country for which the ECB also concluded “that its national legislation is consistent with the Treaty and the Statute.” Hungary’s road to the euro is the longest still, with the country meeting none of the rules, which include price stability, debt & deficit levels below 60% and 3% of GDP respectively and convergence of long-term borrowing costs. Its currency was highly volatile (not in in ERM II) and Hungary’s central bank did not comply with rules of independency and the prohibition on monetary financing. Poland and Romania performed marginally better by only fulfilling the debt condition. The Czech Republic met the interest rate and debt criteria. The ECB noted that the strength of public and economic institutions is an important factor in the sustainability of convergence over time but added that with the exception of Sweden, “the quality of institutions and governance in the countries under review remains weaker than elsewhere in the EU.”

Swiss National Bank vice-president Martin Schlegel will Thomas Jordan’s successor from October 1. Jordan unexpectedly announced to step down back in March after 12 years at the helmet. The number two’s promotion is no big surprise and follows tradition within the SNB. It is also a choice for continuity rather than spurring uncertainty by appointing an outsider. Jordan oversaw the SNB embarking on one of the most aggressive Swiss hiking cycles in the wake of the pandemic before reversing course in March. Pioneering the normalization cycle in the advanced world, Jordan’s SNB back then cut rates by 25 bps, followed by another cut last week to 1.25%. The Swiss franc trades stronger on the day though that move already happened before the announcement. EUR/CHF is trading around 0.956.

Graphs

USD/JPY: one-sided FX moves are not yet “excessive”, so JPY sell-off against strong USD continues

AUD 2y swap rate: sticky monthly inflation data suggest RBA will walk the rate hike talk

US 10-yr yield: long end underperforms. Motion of no confidence in fiscal policy ahead of presidential debate?

CAC40: French assets are back in underperforming modus going into Sunday’s first round of parliamentary elections