On alert due to yen intervention and US inflation

Wayne Cole’s look at the coming days in European and global markets.

The week began with a slight risk aversion: most stock indices were in the red, the dollar rose and US government bond yields fell slightly. However, there was no obvious trigger for these price movements.

The dollar rose to 159.94 yen in early trading, triggering the usual warnings from Japanese officials about “excessive” volatility, which means intervention alarm. The 160.00 mark is considered a red line for the Japanese, as they intervened in late April when the dollar hit 160.245.

The weakness of the yen is exacerbating imported inflation and putting pressure on the Bank of Japan (BoJ) to further reduce its extremely loose monetary policy. The minutes of the central bank’s last meeting confirm that there was much discussion about reducing bond purchases and raising interest rates.

The steady decline in the yen is also affecting emerging markets, putting pressure on Asian currencies as they need to fall to maintain export competitiveness. The Chinese yuan has risen more than 10% against the yen this year and is near its highest level since 1992. This is a key reason why analysts suspect Beijing is revising its own currency downward over time.

Geopolitics also played a major role, with the first US presidential debate taking place on Thursday and the first round of the French elections taking place over the weekend.

According to an opinion poll conducted over the weekend, the far-right Rassemblement National (RN) and its allies were ahead in the first round of the French elections with 35.5 percent of the vote.

The biggest data hurdle for this week will be the US personal consumption expenditures (PCE) price index on Friday, which will have to be really favorable for the market to continue betting on a rate cut in September.

Core is expected to slow to a three-year low of 2.6% year-on-year from 2.8%, with a range of 2.5% to 2.8%. The market is heavily expecting 2.6% or less due to the favorable CPI/PPI reports, so a positive surprise would really hurt.

Analysts also warn that a series of very weak PCE numbers from the second half of last year will ease in the coming months, making it difficult to overcome the base effect. Fed Chairman Powell cited this factor as the reason why core PCE was still at 2.8% at the end of this year, according to the median dot chart.

Key developments that could impact markets on Monday:

– Ifo business climate survey for Germany, CBI order trends for Great Britain for June

– ECB Executive Board members Claudia Buch, Edouard Fernandez-Bollo, Isabel Schnabel and Elizabeth McCaul speak

– Appearances by Austan Goolsbee, Mary Daly and Christopher Waller of the Federal Reserve. Bank of Canada Governor Tiff Macklem speaks

The story goes on

– Dallas Fed manufacturing index for June

(Edited by Muralikumar Anantharaman)