Yen Tumbles on US Yield Upside as Markets React to Strong Retail Earnings/US Data

Key Points

• The dollar was mixed against its G10 peers on Tuesday, with the yen underperforming on a jump in US yields.
• The pound and loonie both gained after UK jobs and Canadian CPI data supported the case for more BoE/BoC tightening.
• The Aussie was flat after hot CPI data canceled out the somewhat dovish RBA minutes.

Yen Slides on US Yield Upside

Upside in US bond yields across the curve, with bond prices weighed (and yields supported) amid a retail sector-led rally in US equity markets, saw the rate differential-sensitive safe haven yen underperform on Tuesday. USD/JPY was last trading with gains of about 0.7%, as market participants focused on the positive signals that better-than-expected earnings from US retail giants Walmart and Home Depot, as well as faster than expected growth in July US Industrial Output, sent about the US economy, as opposed to data showing that rising interest rates/material costs continued to weigh on the housing sector last month.

Analysts agreed that the weakening US housing market, as evidenced in data released by the US Commerce Department that showed US homebuilding falling to its lowest level in nearly 18 months last month, is likely to weigh on US economic growth in the coming quarters. However, this headwind to the economy is not sufficient to deter the Fed from continuing to lift interest rates in the coming quarters, analysts said, with inflation still well above target and the jobs market still tight.

As the economic outlook darkens in Europe and China, divergence in economic performance and central bank policy in favor of the US makes it hard to bet against the buck at the moment, analysts said, even if risk appetite does continue to improve.

Euro Gains Despite Dour Data

Speaking of Europe, Germany’s August ZEW investor sentiment survey fell to levels consistent with a recession on Tuesday, analysts said, amid concerns about the impact of rising living costs on consumption. Separate data showed that the Eurozone economy fell into a trade deficit in June as a result of the recent surge in the cost of imported gas and oil. The Eurozone has, in recent history, typically run a trade surplus, in large part powered by German manufacturing exports.

Still, despite downbeat economic data, and despite commentary from Russia’s state-owned gas export Gazprom on Tuesday warning of a possible further 60% rise in gas prices this winter, the euro was able to post modest gains against the buck amid what appears to be a predominantly technical bounce after two days in the red. As a result of its downside versus the euro and pound, the Dollar Index was slightly in the red on Tuesday in the mid-106.00s, having been unable to get above 107.00 earlier in the day,  despite the weak yen.

Pound, Loonie Gain as Data Supports BoE, BoC Rate Hike Bets

GBP/USD posted a 0.4% bounce on Tuesday, with the latest batch of UK jobs figures interpreted as supporting the case for a 50 bps rate hike from the Bank of England next month. For reference, the UK unemployment rate held near 50-year lows at 3.8% as expected in June, while June wage growth came in a little hotter than expected at 4.7% YoY excluding bonuses and 5.1% YoY including. That’s hot and will trigger concerns at the BoE of a wage-price spiral, though wages aren’t going up nearly as fast as inflation, meaning that real wages dropped in June at the fastest pace since records began in 2001.

There were a few signs of the UK jobs market beginning to cool a little with the number of job gains in the three months to June coming in less than expected, though still at a respectable 160,000, while job vacancies declined for the first time since mid-2020. But nothing concerning enough alters the BoE’s assessment that the UK labor market remains hot. GBP traders will now focus their attention to UK CPI data on Wednesday and Retail Sales figures on Friday. In the last few months, Retail Sales figures have been pretty awful and weighed significantly on the pound, with recent reports showing just how much the British consumer is suffering amid the worst cost-of-living squeeze in a generation.

Elsewhere, like in the UK, data out of Canada supported the case for a 50 bps rate hike from its central bank at its next meeting, helping the loonie rise as a result. Headline Canadian CPI edged lower to a YoY rate of 7.6% in July, but the average of three core measures of inflation watched by the BoC rose to 5.3% from 5.2%, taking it even further above the bank’s 2.0% target. Canadian money markets reacted by pricing in a small chance of a 75 bps rate hike from the BoC at its next meeting early in September, though a 50 bps move remains the market’s base case.

Down under, the Aussie was broadly flat on Tuesday. The minutes of the RBA’s last meeting were interpreted as slightly dovish; the bank reiterated the need for further tightening but talked about needing to keep the economy on an “even keel” and warned that global growth risks are to the downside, implying it won’t tighten overly aggressively at upcoming meetings. However, the Aussie was shielded from losses after the Australian Bureau of Statistics released a new monthly measure of the Consumer Price Index which showed headlines prices rising to 6.8% in June, versus the 6.1% rate it had previously reported for the whole of Q2.

Aussie Wage Price Index data on Wednesday and labor market data on Thursday will provide further inputs into the RBA tightening story. The kiwi, meanwhile, gave up some ground to the buck, with traders awaiting a 50 bps rate hike from the RBNZ during the upcoming Wednesday Asia Pacific session.