Yen: Structurally Bullish
The yen remains an attractive long-term position given its undervaluation and alignment with policymakers. The BOJ has no intention of intervening to stem yen appreciation, reinforcing the case for a structural long.
- Historically, yen strengthens during periods of global risk aversion as Japanese investors repatriate funds.
- The Fed-BOJ yield differential is in a downtrend, supporting a stronger yen over the medium term.
- While the pace of gains may be moderated by both central banks’ cautious stance, I lean towards USD/JPY moving lower towards 138 in the coming weeks.
EUR/USD Outlook
The Fed’s current stance leaves the dollar in a weaker position relative to developed market peers. Despite this, rate differentials still play a role in limiting EUR/USD upside:
- The EUR-USD 2-year swap spread has continued to shrink, now at -0.85bp, compared to -160bp in April and -100bp a month ago.
- Without eurozone growth concerns, EUR/USD would likely be closer to 1.13, purely on rate differentials.
EUR/USD has bounced near its recent highs at 1.1180, reacting to US initial claims data. A weekly close above 1.1160, which coincides with the twenty-month Bollinger Band (1 standard deviation), would signal a significant breakout and open further upside potential.
I think this setup looks constructive, but I would remain cautious on chasing the breakout given the eurozone’s weak growth profile.
Retail Sales
Tuesday’s August retail sales data is expected to see increased market focus, with consensus looking for a -0.2% m/m decline, following a 1.0% gain in July. Any deviation from expectations could have an outsized impact on risk sentiment.
- Retail sales will be a key data point for assessing the resilience of the US consumer in a high-rate environment.
- Note that this week is historically weak for equities, adding further downside risk should there be a deviation.
-William Lun
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