USD/JPY falls back to last month’s lows as broad-based USD sell-off continues

USD: Dropping back to recent lows amidst ongoing Trump policy uncertainty

The US dollar has continued to trade at weaker levels overnight with the dollar index moving closer to the year to date lows set in April at 97.921. The US dollar continues to trade on a weaker footing undermined in part by heightened uncertainty over US trade policy. Recent reports citing a lack of progress in trade talks between China and the US, and President Trump’s decision to double the steel and aluminium tariffs up to 50% from 4th June have added fresh uncertainty at the start of this week. The release overnight of the latest Caixan PMI survey from China revealed a bigger than expected drop by 1.9 points to 48.3 in May. It was the lowest reading since September 2022, and signals that China’s economy is beginning to slow more in response to trade disruption. The accompanying statement released by Caixan Insight Group revealed that “manufacturing supply and demand declined, dragged by overseas demand”, and that “the downward pressure on the economy has significantly intensified compared to preceding periods”. The survey was conducted between 12th and 21st May and covers the period just after the US and China trade truce involving a 90-day delay for US reciprocal tariffs on 12^th May. The US agreed to lower its tariffs to 30%, and China to 10%. The Caixan manufacturing PMI survey stands in contrast to the official manufacturing PMI survey released by the National Bureau of Statistics which showed a modest pick-up by 0.5 points to 49.5 in May. One potential reason for the better official PMI survey was that the survey period is later in the month allowing businesses to better absorb the positive news from the US-China trade truce on 12^th May.

At the same, it was revealed yesterday that the ISM manufacturing survey from the US proved to be weaker than expected in May dropping by 0.2 point to 48.5. After picking up at the end of last year, business confidence in the US manufacturing sector has since declined for the last four months. We expect the negative impact on global growth  from trade disruption and heightened policy uncertainty to become more evident in the coming months. Recently, the global economic data has been holding up better than expected. The economic surprise indices for the US and euro-zone have moved back into positive territory over the past month. It is one reason alongside the recent easing of tariff concerns that market participants have scaled back expectations for more aggressive rate cuts. The US rate market is currently pricing in around 50bps of cuts by year end compared to around 75bps of cuts a month ago. For market participants to have more confidence that the Fed will resume rate cuts, the Fed will need to see clearer evidence that the US labour market is loosening. The release on Friday of the latest nonfarm payrolls report for May could reinforce the US dollar sell-off. The consensus expectation is for employment growth to slow to around 130k compared to the average so far this year of 144k/month with the unemployment rate expected to remain weak. However, if correct it would not be weak enough to significantly bring forward expectations for the timing of the next Fed rate cut from September.                                 

CARRY APPEAL OF JPY-FUNDED CARRY TRADES HAS DIMINISHED

Source: Bloomberg, Macrobond & MUFG GMR

JPY: Regaining lost ground as JGB market consolidates at higher yields

After briefly hitting a high of 146.28 on 29^th May, USD/JPY has since fallen back close to last month’s lows at just above the 142.00-level. At the same time, the long end of the Japanese government bond market has been consolidating at higher yields after last month’s sell-off. The 30-year JGB yield has been trading just below 3.00% ahead of the JPY800 billion auction of 30-year JGBs on Thursday. The MoF held an auction overnight for 10-year JGBs at which it sold JPY2.6 trillion. The bid-to-cover ratio picked up to 3.66 compared to the average over the past year of 2.54 indicating stronger demand. Speculation has increased recently that the MoF may adjust debt sales after it sent a questionnaire to market participants asking their views on issuance and the current situation. Bloomberg has also reported overnight that a draft of the government’s annual fiscal policy plan emphasized the need to increase domestic JGB holdings but didn’t clarify how exactly more government bonds should be held by domestic investors. The government’s goal for achieving a primary budget surplus has been delayed to fiscal year 2025 or 2026.  

At the same time, there has been building speculation that the BoJ could adjust their JGB tapering plans to help ease upward pressure on yields at the long end of the curve. The BoJ is expected to announce their bond purchasing plans for April 2026 onward at its upcoming policy meeting on 17^th June. Governor Ueda told parliament overnight that “many opinions indicated that it’s appropriate to continue cutting bond purchases while balancing predictability and flexibility” when summarizing views expressed by bond market participants. He also indicated that the BoJ will keep the existing plan for cutting bond purchases by JPY400 billion/quarter through to March of next year, by saying there were “limited” views demanding a revision. In addition, he stated that “we have no intention to make room for future rate cuts by forcibly raising our policy rate when we can’t expect improvement in the economy and inflation. We are not expecting the next BoJ hike until later this year. Delayed BoJ hikes are not sufficient in our view to prevent the yen from strengthening further (click here).     

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com