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Monumental week ahead for status on JPY, Trump tariffs, US jobs.
Summary: The week ahead features important event risks, including the remaining US trade deals yet to be made ahead of Friday’s deadline, the FOMC and especially BoJ meetings, and the US jobs report on Friday.
What’s going on: sterling and JPY weak, ECB hawkishness fails to inspire Euro
Volatility has declined across markets this summer, including in foreign exchange, with USDJPY and EURUSD 1-month implied volatility hovering near the low of the range of the year at 9.6% and 7.5%, respectively. These aren’t particularly low levels historically, but in today’s uncertain world feel rather low. Strong global risk sentiment and low vol has allowed the JPY carry trade to thrive and pushed EURJPY, for example, to within striking distance of its all-time high of 175.43 from July of last year – completely unfair if we look at EU-Japan yield spreads, which haven’t been relevant for ages but still stick out like a sore thumb. More in the chart below. Elsewhere, EURUSD posted a meaningful low last week near 1.1550 while I was away on holiday, the USDJPY is rangebound in a vast 142-150 range.
Elsewhere, AUD managed a new high above 0.6600 this week for the first time since November of last year and then promptly spoiled that by backing into the recent range, keeping the impression of an impossibly choppy rising channel in place for now. Sterling has been very weak, with GBPUSD possibly in head-and-shoulders mode if it revisits the 1.3365 area “neckline”. Sterling weakness is remarkable given a supportive backdrop of extremely complacent risk sentiment – the currency could be in for a crisis if we for any reason we lurch into a risk-off environment – recall the sterling dynamics in April!
Next week presents a huge menu of event risks. These could surprise in either direction, but my overall stance for the week ahead is that broad risk sentiment is extremely complacent, and my bias is for a JPY snapback rally at some point soon – certainly next week if the event risks line up in favour of the trade, but even to fade JPY weakness even if the event risks fail to line up for the yen.
Chart: EURJPY
Breaking: just after publishing today's update in its entirety, the news crossed the wires that an LDP member has gathered the votes in both house of Japan's diet to call a joint meeting - suggesting a rebellion in the ranks to force PM Ishiba out, who apparently is resisting calls to resign. This is pressuring the JPY lower.
Recall that last year, the JPY carry trade came undone in spectacular fashion around this time of the year, with USDJPY collapsing quickly after its July peak on a soft US CPI print on July 11 and then accelerating on July 31 on the one-two of a hawkish BoJ and dovish Fed. It’s a bit of déjà vu this year as we have both the Fed and BoJ next week, though we don’t have the JPY strength or much likely potential for a hawkish BoJ. This time around, EURJPY has outperformed USDJPY as the USD has weakened and portfolio allocations, including by Japanese investors, have rotated in Europe’s favour this year. This has taken the EURJPY pair to within striking distance of its all-time high since the introduction of the euro at 175.43 a year ago. There isn’t much for the bears to go on for a bearish reversal here outside of minor momentum divergence, but the pricing looks structurally wrong relative to interest rate spreads and the admittedly useless purchasing power parity. With key event risks coming in next week and the JPY at a massive low on widespread complacency and carry trading and no confirming factors to justify this weakness (outside of long Japanese yields forcing a change of approach by Japan’s MoF in “twisting” its issuance to avoid pressure at the long end – but this problem is vastly larger for the US and Japan has perhaps the most firepower in its Net International Investment Position (NIIP) to do something about this of any major economy! Again, it will take a tremendous downdraft to reverse the bullish trend here, but the trend could come unwound in rapid fashion on a shift to the negative in global risk sentiment in coming weeks. The Thursday Bank of Japan meeting next week is a key potential trigger, as discussed below.
The week ahead:
Have a look later today at the slide deck for today’s Saxo Market Call podcast over at https://saxostrats.podbean.com for the full calendar ahead, but below are the key highlights and issues for the week ahead.
Trump tariffs: extending or ending the tariff uncertainty?
The market has tired of pondering and reacting to Trump tariffs, but next week remains important on the US trade policy front as deals are shaping up with many countries ahead of Trump’s Friday August 1 deadline, with the US and Japan have seemingly got something in place and the noise is that the US and Europe are moving in the right direction. Still, uncertainty is going to linger on this front even if all headline tariff levels settled by next Friday.
In the case of the US-Japan deal, especially controversial is the murky USD 550 billion US-inbound investment fund that Tokyo supposedly pledged as part of the US-Japan deal agreed this week. Trump has described the fund in very different terms than Japan’s PM. (Japan’s PM Ishiba calls it a mix of loans, investments and loan guarantees with a maximum ceiling of USD 550 billion, while Trump says the White House will direct where the funds are invested and the US will get 90% of the profits). US Treasury Secretary Bessent has warned that the US will monitor implementation of the deal and raise the tariff rate to 25% if Trump isn’t happy.
Regardless, It is clear in the way that TOSTADA “works” (Trump Often Signs Then Abandons Deals Anyway) perhaps more than the TACO (Trump Always Chickens Out) that Trump will happily pull the plug on any agreed deal if it isn’t shaping up to the US’ advantage. And would Europe agree to anything resembling Japan’s deal, with promises of massive purchases of US weapons and US-bound investment? The EU-US deal is important to get squared away before next Friday.
Another key date is next Thursday, July 31, as the US Federal Circuit ruling is meant to be made on whether the basis of Trump’s tariffs is legal. If so, this issue disappears and if not, we have to wait for a likely escalation to the Trump-friendly Supreme Court. I am not convinced this issue will stop the tariffs, but this issue needs to be put to bed to be sure.
Central bank meetings triple whammy and US jobs data
We have the Bank of Canada (next to nothing priced) and FOMC (ditto) on Wednesday, with Fed Chair Powell and the FOMC under withering pressure to cut rates, although the friendlier vibes between Powell and Trump yesterday suggest this issue may fade. The degree to which the FOMC statement indicates incoming data as a trigger to cut enhances the reactivity to the US jobs numbers. Recall last month that we got a very weak ADP payrolls that was not confirmed by the firm NFP payrolls change and the 0.2% drop in the unemployment rate.
Finally, we have the important Bank of Japan meeting, where it would be easy for the BoJ to surprise hawkish on the eventual need for rate hikes, given the backdrop of JPY weakness. The odds are tilting higher for a BoJ hawkish surprise now that the BoJ knows the outlines of the trade deal as well. Only 20 basis points of hiking are priced through the December BoJ meeting. FX Board of G10 and CNH trend evolution and strength. Euro and Swiss franc remain the strongest currencies, while Sterling has tilted more negative across the board and silver is on fire. Increasing bias that we are nearing a pivot point on the longstanding JPY weakness as discussed above.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
Table: NEW FX Board Trend Scoreboard for individual pairs. The status of GBPUS is perhaps the most interesting major individual pair to consider here as GBPUSD has snapped back on broad USD weakness from the recent lows, but rolled over yesterday – a bigger downtrend possibly awaits below 1.3365 (head-and-shoulders like neckline) there.
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..