Marc Chandler's weekend post, June 22:
The relationship between interest rate expectations and the foreign exchange levels is more complicated than many textbooks or conventional wisdom allows. Australia's and Norway's central banks pushed against rate cuts this year, and their currencies were rewarded. The Reserve Bank of New Zealand said more or less the same thing, but investors are less sanguine and took the New Zealand dollar down as much as it took the Australian dollar higher. The Bank of Canada is perceived to be one of the most dovish G10 central banks. The market expects at least two more cuts to be delivered this year. Yet, the Canadian dollar was the third strongest G10 currency last week, appreciating by about 0.2% for the second consecutive week. That the Swiss franc was weak, losing 0.4%, is understandable after the SNB surprised many with its second rate cut.
The yen is the outlier. It will take a seven-day losing streak into next week, during which it has fallen by almost 1.8%. This run lifted the greenback to almost JPY159.65, its highest level since the intervention at the end of April, when it briefly traded above JPY160. The US 10-year yield has risen by a couple of basis points during the currency streak. Governor Ueda has explicitly not ruled out a rate hike next month alongside decision on reducing bond purchases (the start of QT), but the market has become less convinced of a rate hike, and the problems at Norinchukin Bank (saying it would have to sell $63 bln of low-yielding US and European government bonds) pushes them in the same direction. The losses the firm projects for this fiscal year more than tripled (to ~$9.5 bln) from an estimate made less than a bond ago. The US Treasury put Japan on its "watch list” for the rise in its exports (though it still runs a trade deficit) and the growing current account surplus (which is driven by capital flows that are flattered in yen terms given its depreciation). Some think this makes intervention less likely.
The markets remain politically charged. The US will see its first presidential debate, but European politics overshadow it. In the next fortnight, the European Union will have a new executive arm, though it has not stopped the outgoing one to announce tariffs on Chinese-produced EVs and from initiating "excessive deficit procedures" against several members. The two big parties in the EU, the center-left and center-right will likely reach out to the Greens, who have not held an EC post before, rather than turn to Meloni's faction. In France, the middle has been eroded but neither the left nor right alliance looks to win outright. In the UK, recent polls warn Prime Minister Sunak may lose his seat, and Labour could see the largest majority in a couple generations.....
....MUCH MORE
