Bull Market Steepening in US Yield Curve Signals Dollar Decline; Commodity Currencies in Focus
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We are finally seeing the kind of bull market steepening in the US yield curve that marks a new stage in the economic cycle. This is typically positive for activity currencies and bearish for the dollar. The dollar may not fall quite as quickly as late last year, but the direction of travel looks clear. Commodity currencies should be favoured now.
USD/JPY: No need for intervention after all
USD/JPY has reversed sharply from 145 – an area where it looked like Tokyo was readying for FX intervention. Instead, it looks like investor positioning for a possible Bank of Japan policy tweak (28 July) and the softer US inflation data have foregone the need for intervention. A sustained move lower in USD/JPY will require some follow-up – i.e. either from the BoJ or US data.
The reason why speculation has built over the 28 July meeting is that the BoJ also releases its Outlook Report containing new forecasts – i.e. whether the rise in CPI is sustainable.
145 could now prove a solid cap. We target 130 for year-end.
Like many others we have been looking for a weaker dollar in the second half of this year but have been uncertain of timing. There is now a strong case that the softer US June CPI numbers have fired the starting pistol on the cyclical dollar decline. Importantly, we look for the June CPI data to presage a series of softer price data releases this year. The Fed should welcome this news.
Strong signs of US disinflation and bullish steepening of the US yield curve should be a EUR/USD positive. Positioning and Rest Of World growth prospects may not trigger the kind of 8% dollar drop seen last Nov-Dec, but the dollar should still decline.
One last hike from the Fed, plus two more hikes from the European Central Bank should keep rate differentials supportive of EUR/USD.