Week in review
- U.S. Federal Reserve holds rates steady at 5.25-5.50%
- Eurozone CPI unchanged at 2.4% y/y
- China Markit manufacturing PMI rose to 51.4
Week ahead
- China new loans and total social financing data
- Bank of England policy meeting
- Eurozone retail sales
Thought of the week
The Japanese yen has seen some wild swings recently, for a moment it weakened against the U.S. dollar past levels not seen since the 1990s, before bouncing back due to possible intervention action. The JPY weakness has been brought about by a combination of a hawkish Federal Reserve versus a dovish Bank of Japan. Recent U.S. data has pushed the Fed to keep rates higher for longer, while the BoJ appears to remain cautious, leaving policy unchanged. A weaker yen is good for exports, but bad for domestic demand and imported inflation. There is some concern that imported inflation would undermine nominal wage growth efforts. Despite the Spring wage growth negotiations leading to a multi-decade high wage increase for union workers, a still significant number of workers in small-medium enterprises are seeing wage increases that still trail inflation. The BoJ will face some pressure for a policy response but faces conflicting issues which makes choices difficult. It can raise rates, stabilizing exchange rates and imported inflation, but doing so risks curbing growth momentum. Otherwise, it can leave policy unchanged, which would mean tolerating a weaker yen and undermining consumption. The desire to keep the yen less volatile will drive the BoJ’s normalization path. We still expect a rate hike later in the year.
JPY reaching levels not seen since the 1990s
Japanese Yen per U.S. dollar spot rate
Market data