FOREX: JPY Remains Neutral Amid Hot Inflation, Consolidation Entrenches

Well, the lights are staying on for another month—so that's the good news. The not-so-good news? My FX P&L slipped this week. Maybe it's a case of being too cautious or not having a crystal-clear strategy for the current market moves. Still, it’s oddly satisfying to see USDJPY and EURUSD clinging to the levels we predicted: EURUSD hovering just below 1.1100 and USDJPY flirting with 145.

U.S. Treasury markets barely made a peep yesterday, with 2Y and 10Y yields ticking up by less than 3 basis points, leaving the 10Y yield sitting at 3.861% and providing little in the way of signal.

As for today's PCE data, I’m not expecting it to rock the boat. I’m aligned with the consensus at a 0.2% MoM increase, which should keep the 100 basis points of cuts firmly on the table.

In the broader FX picture, today’s inflation numbers are crucial for maintaining the direction. The U.S. is rolling out its July core PCE figures, and while I’m in lockstep with the consensus, I don’t see this data point being a game-changer. The latest U.S. economic data has pretty much confirmed what we already knew: the economy started the summer with some solid momentum, and disinflation is ticking along nicely. The revision of core PCE for Q2 from 2.9% to 2.8% is a positive sign, hinting that we might see an even softer monthly trend.

But here's the thing—the dollar doesn’t seem poised for a dramatic drop in the immediate term. The market has already priced in a lot of the Fed’s dovish tone, so the big move in the dollar might have already played out. ( expect for the USDJPY maybe)This week has felt more like a consolidation phase for FX, and with the U.S. Labor Day holiday just around the corner, I’m expecting range-bound trading today, even with the PCE data on deck.

The yen may be treading water this morning, much like its G10 counterparts, but don't let that fool you—the inflation data out of Tokyo today is anything but insignificant. The numbers came in hotter than expected, with the core inflation rate ticking up from 2.2% to 2.4% in August, and the core-core rate nudging up from 1.5% to 1.6%, defying expectations for a drop to 1.4%. Add to that a pickup in Japan’s job-to-applicant ratio and a 2.8% rebound in industrial production (though still shy of expectations), and you’ve got a data set that strengthens the case for a Bank of Japan rate hike later this year.

But let's not get ahead of ourselves—while today’s data gives the BoJ more ammo, the incremental shifts in the US rates market are likely to steal the show as we head into NFP week. With no one looking to bet big against the dollar at current levels, the focus will be on how far we can stretch the rubber band before it snaps back. We’re eyeing a potential pullback to the 146-147 range as an opportunity to load up on bigger USDJPY shorts next week.

Meanwhile, what once seemed like the no-brainer play—shorting the dollar against the euro—has turned into a bit of a head-scratcher. The risk of the ECB playing catch-up with the Fed in the rate-cutting game has thrown a wrench in that strategy. But back to the yen: today’s strong data aligns with our view that the BoJ is on track for another rate hike in December. Governor Ueda and Deputy Governor Himino have been laying the groundwork, and with global risk appetite on the rise, the argument for delaying a hike for the sake of market stability is losing steam by the day.

There’s currently only 8bps of hikes priced in by year-end, which we think is far too low—making OIS market pricing a potential source of upside risk for the yen in the coming weeks. So, if you’re looking to place your dollar shorts, the yen still seems like the right horse to bet on. Let’s see if next week offers a better entry point.

ANNUAL TOKYO HEADLINE CPI LOOKS TO BE ACCELERATING ONCE AGAIN