Weekly Investment View: Stay Bullish USD/JPY and Cautious on EM FX

This Week 

Bilal stays bullish USD/JPY despite a potential YCC adjustment from the BoJ; Dominique previews Thursday’s GDP data release given the remarkable 4.5% reading for Q3; John argues a major selloff in equities is unlikely; Caroline still thinks Hungary’s rate move will be a 50bp cut to 12.5%, with risks skewed towards a smaller 25bp cut; Mirza looks at the rapid drain in global liquidity that is affecting emerging markets; Henry believes the ECB will hold at 4% on Thursday; Ben expects the Bank of Canada to also pause tomorrow; Viresh argues oil markets have already priced much of the geopolitical risk.

Bilal Hafeez – Global Macro

A recent Nikkei article suggested the 31 October BoJ meeting could see the YCC adjusted or ended. The BoJ could be watching the market reaction to the article to help them decide. So far, 10 JGB yields are marginally higher since the article, and USD/JPY is almost unchanged. Admittedly, US yields have fallen, perhaps explaining the muted reaction. Nevertheless, that Japanese markets have not reacted significantly could increase the odds of a YCC adjustment. 

On our bullish USD/JPY view, I do not think a YCC change will see much yen strength. For one, USD/JPY is reacting less to YCC adjustments in recent years (Chart 1). The last one saw USD/JPY rally over the subsequent month. For another, the market cares more about the short end. Were the BoJ to lift policy rates, that would be significant and could see yen strength – I do not currently see that as on the table. So, I stay bullish USD/JPY. 

Dominique Dwor-Frecaut – US Macro

I focus on PCE and GDP this week. On the first, I agree with the consensus that implies core PCE nearing median price and energy PCE (Chart 2).

On GDP, I have been consistently positive on growth since mid-2022 based on very loose fiscal policy, loose monetary policy and the very low household savings rate. However, Q3 GDP at 4.5% is far above anything I had expected. I suspect this is what is happening:

1. An inventory/external trade cycle that, based on the Atlanta Fed, is contributing 1.7%.
2. Residential investment is turning positive, partly due to the perverse effect of fast Fed tightening following decades of low rates.
3. Durable goods consumption recovering from a boom bust cycle in Q1/Q2.
4. Corporate investment blitzed by the misnamed ‘Inflation Reduction Act’.

We find out on Thursday.

John Tierney – US Equities

Geopolitics in the Middle East, rates and earnings together drove the S&P 500 down 2% last week – we expect this pressure to continue (Chart 3). Still, we hesitate to underweight equities as we see the recent selloff as a rational response to higher rates not the beginning of the herd rushing for the exits.

Equities continue to get support from low unemployment, a dovish Fed, and rising earnings. While these persist, we think a major selloff is unlikely.

It will be a blockbuster week for earnings, with some 300 companies in the Russell 1000 reporting. Only the tech giants really matter – Alphabet, Amazon, Apple, Meta Platforms, and Microsoft. Caterpillar will also be a key bellwether.

We still like a tactical overweight in consumer staples via the ETF XLP. We unwind our overweight in Coca-Cola as it has significantly outperformed XLP and SPX this month.

Caroline Grady – Emerging Markets

A 4.2pp deceleration in YoY inflation in September provides little guidance on the size of Hungary’s next interest rate cut. This will be the first cut in the policy rate after five 100bp cuts to what had been the effective o/n depo rate.

NBH policymakers have stressed a cautious and prudent approach, with the easing cycle not on autopilot. September CPI at 12.2% was in line with the NBH forecasts but remains way above the 3% +/-1pp target, while moderate currency weakness and higher oil prices leave upside risks. We still expect a 50bp cut to 12.5%, with risks skewed towards a smaller 25bps cut.

Mirza Baig – Emerging Markets

Emerging markets face one of the most rapid drains in global liquidity in recent memory. External balances are at risk from an extended recession in global manufacturing, though there are some hopeful signs in North Asian exports data. External financing is becoming more expensive, and risk appetite for carry trades has weakened in line with widening US high yield spreads.

We remain cautious on EM FX and prefer to express bearish trades where yields are relatively low, namely CNH, CZK, INR, MYR and THB.

Henry Occleston – Eurozone & UK Macro

We expect the ECB will hold deposit rate steady at 4.0% this week. Following recent data releases, upside risks to terminal rate have softened somewhat. However, the ECB will likely push back strongly against cuts early next year. There is upside risk of markets pricing in more in the near term.

Inflation data is settling, but wage growth remains very strong, and wage-intensive services inflation has been capped by falling accommodation prices. If this settles, we could see more hawkishness peak through.

Fiscal policy announcements remain a risk. With manufacturing in such dire straits, the risk of new government support in 2024 is elevated.

Despite the recent rise in real rates, EZ financial conditions continue to loosen. It seems highly likely that a discussion on PEPP reinvestments will be mentioned (at the very least in the presser). There is a risk that they are ended before end-2024.

Expect to hear more about the ECB’s framework review. This could have important implications for the size of the ECB balance sheet. Recent discussions have added to fears the minimum reserve requirement could be raised from 1% to above the 2% it was at pre-2012.

We do not expect the ECB will hike again before year-end, but with almost nothing priced in there is still value paying December 2023 ECB-dated OIS.

Ben Ford – $-Bloc & Scandies

We expect the Bank of Canada to pause on Wednesday, leaving the policy rate at 5%, as a result. (Nearly) everyone agrees, too. So, while the decision is unlikely to prove market moving, we think there will be plenty to digest in their tone; we expect the BoC to deliver a hawkish pause. That is because the BoC has concentrated on three data points that, providing the economy tracked largely as expected, would decide future hawkishness. And, so far, none have shown great promise:

• Core inflation momentum remains stubbornly high (Chart 7). Despite core inflation measures disappointing market expectations, it was enough to keep momentum elevated.
• The labour market suite indicates tightening and that is before factoring in the higher-than-expected Canadian wages.
• Corporate pricing behaviour remains abnormal.

As a result, the BoC will have a tricky job on their hands juggling resilient inflationary pressures with softer domestic data.

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