The yen drops to a 20-year low against the dollar

The burning question of the moment remains: how high can US rates rise and will they negatively impact the economy at some point? In comments last week, Fed Vice Chair Lael Brainard said that “right now, it’s very hard to see the case for a pause[ at the September meeting]. We’ve still got a lot of work to do to get inflation down to our 2% target”. Her statements effectively endorse the two forthcoming upgrades at the meetings to be held on 15 June and 27 July. A half-point hike is expected each time. Especially since, in her words, this “seems like a reasonable path”. This view seems to be the consensus within the Fed. James Bullard of the St. Louis Fed, a hawk, maintains his particularly aggressive view of a rate hike to 3.5% by the end of the year. Mary Daly of the San Francisco Fed is also in favour of two 50 point hikes in the next two meetings as she too believes that the Federal Reserve must do all it can to bring inflation back to more reasonable levels. In the wake of these comments, the yield on 10-year Treasury bonds rose back above 3% at the beginning of the week. The rise in yields has helped to stabilise the dollar against the euro. After peaking in 2022 at 1.0350, the greenback had fallen back to 1.0786 with the prospect of monetary tightening in the eurozone. For the time being the exchange rate seems to have found a balance and the next movement will certainly be linked to the monetary policy decisions and their timing. The European Central Bank meets tomorrow, a week before the Fed, and this should create volatility for the days to come depending on what Christine Lagarde and Jerome Powell have to say.

As a victim of a diametrically opposed monetary policy, the Japanese currency fell sharply against the greenback. The Japanese currency is still losing ground and has fallen by more than 3% over a week against the dollar. It traded above JPY 133 this morning – a 20-year low against the dollar. The Bank of Japan’s ultra-accommodative monetary policy is weakening the yen. BOJ Governor Kuroda said that a weak yen could help the economy and boost inflation. The market is again starting to speculate on possible interventions but Mr. Kuroda’s words and the central bank’s unwillingness to intervene in the markets (see commentary of 4 May 2022) suggest that the Japanese currency still has room to fall before the BOJ takes action.

In Switzerland, inflation rose by an annualised 2.9% in May, up from 2.5% in April. It is the biggest increase since 2008. And even though, it remains well below that of our neighbours, it should not leave the Swiss National Bank’s Governing Board unmoved. This new surge in inflation could prompt the bank to raise interest rates as soon as 16 June at its meeting. By acting before the ECB, the SNB could allow the Swiss franc to appreciate further in order to curb the upward pressure on prices. With this in mind, after the release of the data, the franc experienced a strong upward reaction to 1.0220 francs per euro. But the return above 1.0400 shows that the markets are not confident, for the time being, that the SNB will act next week.

Following the trend of the Fed, two other central banks raised their interest rates. Thus, as expected, the Bank of Canada raised its key rate from 1.0% to 1.5% last week. This is the second consecutive 50-basis point hike. Furthermore, the bank said it was ready to act further if necessary to bring inflation back to the 2% target. In its statement, it said that it is likely to rise even higher in the short term before it begins to ease. Yesterday, the Central Bank of Australia also raised its main rate by half a point to 0.85%, pointing to the rise in inflation as the reason for this higher-than-expected jump. It expects inflation exceed its forecasts in the future due to rising prices for electricity, gas and oil. “The Board expects to take further steps […] over the months ahead”, it said.

Despite the OPEC+’s announcement last week that it would increase oil production in July, crude oil prices have risen again.  Oil is rising in a very volatile market that is moving between concerns about inflation, developments in the Ukraine conflict and hopes for a recovery in China WTI crude oil set a new record on Monday, reaching $120.99, the highest price since 2008.