The Japanese Yen grabs most attention this morning

Markets

The Japanese yen grabs most attention this morning. Dollar strength pushed USD/JPY last Friday above 159.50 following stronger-than-expected June PMI’s and the pair is still flirting with the 160 mark this morning (34-yr JPY low). This level prompted FX interventions to the tune of almost JPY 10tn by the Japanese Ministry of Finance at the end of April and alarm bells are ringing this time around as well. Vice Finance minister Kanda confirmed preparedness to take appropriate action in the event of excessive FX moves based on speculation. Excessive currency fluctuation negatively impact the national economy, he added. Finance Minister Suzuki later added weight by stressing that the government is watching FX moves closely. Minutes from the June Bank of Japan meeting fail to help the currency even as they bolster the case for a July rate hike: “if deemed appropriate, the central bank should raise the policy rate before it’s too late”. A small Japanese interest rate adjustment obviously doesn’t suffice against a hawkish leaning Fed keeping policy rates at their peak levels for longer.

Most recent French election polls continue pointing to a win for Marine Le Pen’s Rassemblement National in the first round of legislative elections next Sunday. They are forecast to get 35.5% of the vote, ahead of alliance of leftwing parties (Nouveau Front Populaire, 29%) and President Macron’s alliance (Ensemble, 21%). In the projected seat tally, they fail to get an outright majority though (210-250 guestimate in 577-seat parliament). Such hung parliament risks putting France in a political deadlock with RN (Bardella) so far ruling out delivering a PM for a minority government. Political uncertainty could thus remain high after elections with little momentum to put French ailing public finances back on track. The French 10-yr OAT-swapspread continues trading near recent multiyear highs (+45 bps) with French bonds unlikely to pull any comeback soon. The German/French 10-yr yield spread hit 80 bps for the first time since 2012. Euro weakness holds EUR/USD (just) below 1.07 this morning. The YTD low at 1.0601 remains the travel direction. Today’s eco calendar is thin with only German Ifo business climate which will normally reflect Friday’s weakness in PMI’s (political uncertainty). Speeches by ECB and Fed governors are a wildcard. This week’s eco agenda is back-loaded with the Fed’s preferred (May) PCE deflators and first national EMU (June) CPI data on Friday.

News and views

The IMF in its annual review said that Hungary has come a long way reducing double digit inflation and bringing the current account deficit under control. It expects average annual inflation of 4.2% this year to ease to the 3% central bank target by 2026. But significant challenges remain with the fiscal deficit and debt ratio still well above the pre-pandemic levels. It also said that the windfall taxes introduced in 2022 are increasing market uncertainty and expressed criticism on the country’s “excessively high” and competition-hindering state ownership in key sectors. The IMF lashed out at the government’s interest rate freeze as well, as it distorts market conditions. The Hungarian government recently extended an interest rate cap on retail loans (introduced in Jan 2022) until the end of 2024. The IMF urged Hungary to pursue a credible and growth-friendly fiscal consolidation plan and said the government should help the central bank’s efforts to reduce inflation. The IMF lastly stressed that structural and governance reforms are necessary or risk losing access to the remaining locked up European funds, in turn leading to a higher risk premium, a weaker forint and tighter monetary policy weighing on growth.

China’s fiscal revenue fell 2.8% in the first five months of 2024 compared to the same period last year. It’s also an acceleration from the 2.7% drop in the January-April period and a sign of sluggish demand and the fragile property sector continuing to weigh on the economy. Expenditures rose 3.4% in the five months to May. The government pledged more fiscal stimulus to support the ailing economy and to reach the (ambitious) 5% growth target for this year. Part of the efforts include the recently kicked-off sale of CNY 1tn long-dated special treasury bonds to help fund mega projects in key sectors.

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