FUNDAMENTAL BREAKDOWN

10th JULY 2023

 OVERALL REVIEW

(Previous week)

-Japanese Yen exhibited an impressive rally last week and ended as the
strongest performer. The move was spurred by Japan’s substantial wage
growth, which shot JGB yield higher and countered the impact of rising
benchmark yields in the US and Eurozone. In light of these
developments, signs are pointing towards a potential bullish reversal for
Yen that could transpire without government intervention.
Contrastingly, Dollar failed to impress, ending as the second worst
performer after Canadian Dollar, despite the release of solid job data.
Strong rally in 10-year yield seemingly did little to support the
greenback. The resurgence of Yen and robustness of Euro have
potentially laid the groundwork for Dollar Index to plunge below the 100
mark. Concurrently, Gold appears to be gearing up for another attempt
at bullish reversal as pressure mounts on the greenback again.
Elsewhere in the currency markets, New Zealand Dollar ended as second
strongest performer of the week, closely followed by British The
Australian Dollar, however, found itself on the backfoot, ending as the
third weakest. Swiss Franc and Euro presented mixed results,
overshadowed by the solid performance from Sterling.

(Pairs to watch out for)

NZD (rate decision)

CAD (rate decision)

USD (CPI data)

GBP (GDP data)
 USD
(Positive)
-The dollar’s strength was driven by the publication of the minutes from the Federal Open
Market Committee’s (FOMC) last meeting on June 14.
-June hiring data came in short of expectations and signal the recent trend in hiring is
clearly lower. But continued economic resilience and generally robust incoming data still
give the Fed the green light to resume monetary policy tightening on July 26.

-On the face of it, there is nothing too alarming about either figure as both are headed in
the right direction. However, with the core measures still printing so high above the target,
the Fed cannot afford to take its eye off the ball. It explains why FOMC members have
maintained such a strong bias for more tightening even though they decided to keep rates
on hold in June.

(Negative)

-Dollar failed to impress, ending as the second worst performer after Canadian Dollar,
despite the release of solid job data. Strong rally in 10-year yield seemingly did little to
support the greenback. The resurgence of Yen and robustness of Euro have potentially laid
the groundwork for Dollar Index to plunge below the 100 mark.
-NFP was indeed solid, with strong showing in both headline jobs and wage growth.
However, the markets seemed to focus more on this being the lowest job growth figure
since 2020.

(Mixed / Inconclusive)
-As it stands, fed funds futures market is pricing in less than 50% chance of another rate
hike after July. Simultaneously, predictions do not foresee a greater than 50% chance of
the first rate cut until May next year.
-However, any significant adjustment in BoJ’s YCC and accompanied upside acceleration
Yen could propel DXY through 98.6.

-A stronger-than-expected CPI report would push up the odds for a 25-bps rate rise in July
as well as for an additional hike later in the year. However, if the inflation data is on the
soft side, particularly if core CPI falls more than expected, the euro could have another
attempt at overcoming the $1.1075

Conclusion:
FOMC and Powell insistent on more rate hikes but the market is still unconvinced, hence
the drop when the market looked deeper into the NFP report to focus on the negative
numbers rather than positive. Read above for expectations of what the CPI report could
produce in the market.
 EUR

(Positive)

-Despite mounting signs that inflation is cooling off and economic activity is stagnating, the
ECB still decided to telegraph its intentions for higher rates.

-Another blessing for the euro has been the weakness in the US dollar, and even more so
in the Japanese yen lately.

(Negative)
-This depreciation can be attributed, in part, to the Euro’s general weakness following the
latest inflation reports.
-It would take “material change” for the committee to not raise rates, with a pause not
even under consideration until now.

(Mixed / Inconclusive)

-Currency markets have been trading almost entirely on rate differentials lately, helping to
explain the strength in the euro as the ECB maintained a hawkish stance. However, with
central banks approaching the end of their tightening cycles, the next trading theme might
be growth differentials, which clearly favor the US.

--A stronger-than-expected CPI report would push up the odds for a 25-bps rate rise in July
as well as for an additional hike later in the year. However, if the inflation data is on the
soft side, particularly if core CPI falls more than expected, the euro could have another
attempt at overcoming the $1.1075

Conclusion:

Not much at the moment, movement will most likely be based on reactions and risk flows
based on US data next week. EUR been doing much better than most other currencies
though.
 GBP

(Positive)
- - It was also helped by the fact that the UK Manufacturing Purchasing Managers’ Index
(PMI) came in at 46.5 in June, which, although lower than the previous figure of 47.1,
was above the market expectation of 46.2.
- gainst this backdrop, the likelihood of further active tightening of monetary policy by
the Bank of England (BoE) is practically beyond doubt.
- The pound was buoyed by weak manufacturing activity and labor market data in the US,
and doubts about the continuation of the Fed’s hawkish stance.
- - “The trend momentum remains confidently bullish across short-term, medium-term,
and long-term oscillators, suggesting that the push to 1.2850 (and beyond) is still in
play,” Scotiabank economists write.
(Negative)

-As for sterling, the outlook seems cautiously negative. The UK economy might be
stabilizing but is still fragile, its inflation problem is bigger than other nations, and the BoE
is near the end of its tightening campaign. Combined with the pound’s sensitivity to the
global investment mood at a time of turbulence in the markets, it’s tough to be optimistic.

(Mixed)
-Notable events for the upcoming week include a speech by Bank of England Governor
Andrew Bailey on Monday, July 10, and the release of the UK’s labour market data on
Tuesday, July 11.
-the UK will see the release of its employment numbers for May on Tuesday, ahead of
monthly GDP data for the same month on Thursday.

Conclusion:

Recently, GBP been finding more strength when other currencies have been struggling,
especially since there's been slightly better data recently as well as increased expectations
of further rate hikes. Depending on how USD does, I can imagine GBP getting stronger.
Data out this week to really monitor.
 NZD

(Positive)
-
(Negative)

-(RBNZ) largely stayed the course it set out in April but indicated cuts to the cash rate could
materialise sooner than markets imagined.
- the vote was split with some members favouring no action, and the overarching message
was that this is probably the peak for rates.
-"The forward guidance today was more dovish than expected. The RBNZ kept a fairly
neutral guidance rather than our expectation of guiding towards further hikes,"
-While the Chinese economy outperformed in Q1 after Zero-COVID measures were lifted,
momentum from the first quarter has not been able to sustain itself and growth prospects
are fading quickly.

(Mixed)
-Economic data since then has been mixed, with GDP growth turning slightly negative in Q1
but survey-based indicators pointing to a recovery in the second quarter. Overall though,
nothing shocking enough to nudge the RBNZ out of its neutral stance.
-Therefore, the reaction in the New Zealand dollar might be relatively minimal, leaving the
currency mostly in the hands of global risk sentiment and any news out of China.

-Confirmation of expectations for a pause on Wednesday would cause a small

disappointment and thus prompt a sell-off in the kiwi/dollar pair. In this case, a move
towards the 0.6060-0.6092 area looks plausible.
- In the likely event of a rate hike, kiwi bulls will probably react with enthusiasm. The
0.6171-0.6187 area is unlikely to stand in the bulls’ way, as the main target would probably
be closer to the 0.6272 area

-Conclusion:
The RBNZ meet next week with some slightly negative bias towards it so far with poor data
as well as weaker Chinese data. However, the possibility of both directions can be seen
above depending on what decision is made, as pause or a small rate hike.
 AUD

(Positive)

-The aussie has been on a roll lately, as the RBA pivots further to the hawkish side and
Beijing steps up its efforts to stimulate the Chinese economy, which is the biggest market
for Australian exporters. Further gains could be in store for the currency if the minutes
reinforce bets for further rate hikes by the RBA and China sticks to its pledge to boost
growth.

-they reaffirmed their willingness to do what is necessary to bring inflation to target.

-However, a third consecutive hike cannot be completely ruled out as the labour market
continues to tighten. Employment rose by an impressive 76k in May. Even if the RBA skips
a move in July, it will likely maintain a hawkish stance, keeping the door open to further
tightening in the future.
(Negative)

-Both Australian and New Zealand Dollars emerged as the week’s biggest losers, each
impacted to varying degrees by the increasingly pessimistic view on economy of China.
-While the Chinese economy outperformed in Q1 after Zero-COVID measures were lifted,
momentum from the first quarter has not been able to sustain itself and growth prospects
are fading quickly.
-The fall in the 12-month CPI rate to 5.6% in June, combined with soft PMI figures for the
same month and ongoing doubts about the Chinese economy, suggests it’s time to pause
this month.

(Mixed)

-Conclusion:
Not much at the moment
 CAD

(Positive)

- -Canada’s job market sizzled in June, with job gains beating expectations by a factor of
three. Odds are the Bank of Canada raises rates a quarter point next week to further
slow demand in an overheated economy.

(Negative)

-Employment in Canada unexpectedly fell in May so another weak report in June could
almost certainly keep the BoC on hold in July, especially as there was a downside surprise
in inflation too.

(Mixed)

-Nevertheless, with the employment market offering little sunshade buffer, the Bank is
likely to raise rates next week.

-Canada will also be closely watched, especially the Bank of Canada rate decision, which is
currently priced as a coin toss.

-In the FX market, the risks seem tilted towards a negative reaction in the Canadian
dollar. With inflation coming down, it would make more sense for the BoC to take the
sidelines for now. Even if the BoC raises rates and the loonie spikes higher, there’s still a
risk the initial excitement fades quickly if policymakers signal this is probably their final
move.

-Hence, it’s a true dilemma for the central bank – inflation is cooling but several factors
suggest it could heat up again moving forward.

Conclusion:

With employment data coming in much better last week, this may aid to shift the BOC to a
rate hike but still, all movement will depend on what decision is taken. Still 50/50 chance
with this until we see it.
 JPY
(Positive)

- (Long term it will strengthen as soon as we see confirmations of a change in monetary

policy).

- -Japanese Yen exhibited an impressive rally last week and ended as the strongest
performer. The move was spurred by Japan’s substantial wage growth, which shot JGB
yield higher and countered the impact of rising benchmark yields in the US and
Eurozone. In light of these developments, signs are pointing towards a potential bullish
reversal for Yen that could transpire without government intervention.

- -The Bank of Japan’s Tankan Survey offered an early indication that Japan’s recovery
continued, and perhaps even gathered momentum, during the second quarter. The
results suggest some upside risk to our 2023 GDP growth forecast of 1.2% and are also a
factor that could eventually see a hawkish Bank of Japan policy shift later this year.
- (Negative)

-Despite Japan experiencing higher inflation by their own standards, it is not expected that
BoJ will alter its ultra-loose monetary policy in the near future.
-Japanese Yen emerged as the worst performer following BoJ’s dovish stance, leading bond
traders to abandon hopes for any changes to yield curve control.
-Bank of Japan (BoJ) kept its yield curve control policy unchanged this morning as widely
expected. The yen weakened further on the decision, with USD/JPY trading up around
140.7 levels.
-BoJ’s Minutes showed that the current monetary easing should be maintained.
-The BoJ looks too scared of deflation as they’ve been fighting against it for decades.

(Mixed)
- (Long term) Strategists at BNP Paribas make a similar forecast – they target the level of
130.00 by the end of this year and 123.00 by the end of 2024.
- No significant economic information related to the Japanese economy is expected to be
released in the upcoming week.

Conclusion:
For the first time for a while, JPY data really helped it last week, and the market is hoping
to get more of the same and eventually push the BOJ away form the ultra loose monetary
stance. Until it happens though, it wont be for certain. Again, big USD news next week will
also determine the direction.
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