Bank of Japan Opens Door for a Hawkish Double Surprise

Economic

Summary:

BOJ signals bigger stimulus cuts in July, even a rate hike, to fight inflation and a weak yen. They aim for a large bond buying reduction but want to avoid market chaos.

The Bank of Japan is dropping signals its quantitative tightening (QT) plan in July could be bigger than markets think, and may even be accompanied by an interest rate hike, as it steps up a steady retreat from its still-huge monetary stimulus.

Hawkish hints delivered over the past week highlight the pressure the central bank faces in the wake of renewed yen falls, which could push inflation well above its 2% target by raising import costs.

Notwithstanding a market shock or severe economic downturn, a rate hike would be on the table at each policy meeting, including July's, said three sources familiar with its thinking.

"Given what's happening with inflation, interest rates are clearly too low," said one of the sources. "Much depends on upcoming data, but a July rate hike is a possibility," another source said, a view echoed by a third source.

The BOJ kept interest rates steady around zero this month.

However, the board debated the need for a timely hike with one member signaling the chance of doing so to prevent cost pressures from pushing up inflation too much, a summary of the meeting showed on Monday.

That was largely read as a sign the bank is gearing up for near-term action.

Governor Kazuo Ueda told reporters after the meeting that a rate hike next month cannot be ruled out.

Hiking rates at the July 30-31 meeting could have a huge impact on markets, as the BOJ also intends to announce a detailed plan on how it would trim its massive bond buying and reduce the size of its $5 trillion balance sheet.

Bank of Japan Opens Door for a Hawkish Double Surprise_1

Ueda has said the BOJ could make a "sizeable" cut to its bond buying, suggesting the scale of reduction could be large to ensure markets shake off the shackles of yield curve control - a policy that was ditched in March.

As with other central banks, the focus of the BOJ would be to craft a QT plan that avoids causing unwelcome spikes in bond yields.

But concerns over the weak yen also require the QT plan to be ambitious enough to avoid underwhelming market expectations and triggering sharp declines in the currency.

The trade-off means the BOJ will likely announce a plan to trim monthly buying at a steady, set pace, while leaving some flexibility to adjust the speed as needed, the sources said.

While there is no consensus within the bank on the details, one idea being brainstormed is a design similar to the U.S. Federal Reserve's that mechanically trims buying, albeit with more flexibility.

The BOJ can do this by indicating a narrow range, instead of a set figure, at which it will trim bond buying. It can also insert an "escape clause" that pledges to slow or temporarily halt tapering if markets become too volatile, the sources said.

The bank will taper across various bond maturities in a way that does not cause distortions in the yield curve, they said.

The BOJ will hold a meeting with bond market participants on July 9-10 to collect their views on what kind of plan will work, a move one board member said was aimed at ensuring it can trim buying "to a greater extent," the June meeting summary showed.

Izuru Kato, chief economist at Totan Research and a veteran BOJ watcher, said the central bank must balance the need for exchange rate stability with the need for bond market stability.

For that reason, it may look to deepen the cuts to its bond buying each quarter.

"If the yen keeps weakening, the BOJ could do both the taper and a rate hike in July," Kato said. "Just going with a taper might not be enough to prevent the yen from falling further."

Source: Reuters

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Alex

Economic

The group's "Dollar Dominance Monitor" said the dollar continued to dominate foreign reserve holdings, trade invoicing, and currency transactions globally and its role as the primary global reserve currency was secure in the near and medium term.

Dollar dominance — the outsized role of the U.S. dollar in the world economy — has been strengthened recently given the robust U.S. economy, tighter monetary policy and heightened geopolitical risks, even as economic fragmentation has strengthened a push by BRICS countries to shift into other international and reserve currencies.

The Atlantic Council report said Western sanctions on Russia imposed by the Group of Seven advanced economies after Moscow's invasion of Ukraine had accelerated efforts by the BRICS countries to develop a currency union, but the group had been unable to make progress on its de-dollarization efforts.

BRICS is an intergovernmental organization made up of Brazil, Russia, India, China, South Africa, Iran, Egypt, Ethiopia, and the United Arab Emirates.

The council said China's Cross-Border Interbank Payment System (CIPS) added 62 direct participants in the 12 months to May 2024, an increase of 78%, bringing the total to 142 direct participants and 1,394 indirect participants.

Negotiations around an intra-BRICS payment system were still in the nascent stages, but bilateral and multilateral agreements within the group could form the basis for a currency exchange platform over time. However, these agreements were not easily scalable, since they were negotiated individually, the report said.

It noted that China has actively supported renminbi liquidity through swap lines with its trade partners, but the share of renminbi in global foreign currency reserves dropped to 2.3% from the peak of 2.8% in 2022.

"This is possibly because of reserve managers’ concern about China’s economy, Beijing’s position on the Russia-Ukraine war, and a potential Chinese invasion of Taiwan contributing to the perception of the renminbi as a geopolitically risky reserve currency," the report said.

The euro, once considered a competitor to the dollar's international role, was also weakening as an alternative currency, with those looking to reduce their risk exposure turning to gold instead, the report said.

It said Russian sanctions had made it clear to reserve managers that the euro was exposed to similar geopolitical risks as the dollar. Concerns around macroeconomic stability, fiscal consolidation, and the lack of a European capital markets union also hurt the euro’s international role, it said.

Source：Reuters

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Thomas

Stocks

Thailand plans to raise the tax allowance and trim lock-up periods for holders of funds focused on environmental, social and governance (ESG) factors, as part of efforts to bolster the local equity market, hit by a foreign investor exodus.

Individual investments of as much as 300,000 baht (US$8,170 or RM38,521) in ESG-focused funds will become eligible for tax breaks, up from 100,000 baht, said Pornanong Budsaratragoon, the secretary general of the nation's Securities and Exchange Commission.

The government will also reduce the period that the investments must be held to qualify for the levy waiver to five years from eight years, she said, noting that the proposals will be forwarded to the Cabinet for approval.

Prime Minister Srettha Thavisin's government has stepped up efforts to revive investor confidence in domestic stocks after corporate scandals, irregular market trading and political uncertainty contributed to a 7% slide so far this year in the country's SET Index. The measure is Asia's worst-performing major benchmark this year after foreign investors withdrew about US$3 billion from Thailand's equities. Thailand to Raise Tax Breaks, Trim Lock-Ups to Buoy Stocks_1

Thailand to Raise Tax Breaks, Trim Lock-Ups to Buoy Stocks_1

The Stock Exchange of Thailand is also poised to implement a set of measures from July 1 to shore up investor confidence. It will require high-frequency traders to register before they can place their orders, besides disclosing information on investors conducting "inappropriate trading practices" to member brokerages to enable more effective supervision.

The adjustments to the ESG-focused fund investment conditions follow the Finance Ministry's approval in December of the initial tax incentive to entice individuals to buy local equities and green investments. The measures drew about six billion baht into ESG funds.

"The reduction in the lock-up period will help attract more individual investors into these funds," Pornanong said, adding that the move is in line with the government's commitment to promote ESG-linked assets, including bonds and digital tokens.

"Investment rules for ESG-focused funds will also be eased to allow them to invest in stocks that have a good corporate governance rating from accredited agencies," she said.

Finance Minister Pichai Chunhavajira said the relaxation in equities eligible to be covered by the funds will expand the number of stocks to more than 200 from about 100 shares now.

The SET ESG Index, a gauge of ESG-linked companies, jumped 0.9% on Monday, trimming this year's loss to 9%. The 121-member measure tumbled 13% last year, compared with a 15% slide in the SET Index.

Thailand's Finance Ministry is also weighing setting up a new state-managed fund aimed at appealing to local investors by offering guaranteed returns, Pichai said. Such a fund can attract more individuals and support the broader stock market, he said.

Source: Bloomberg

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Warren Takunda

Cryptocurrency

A “cascading long squeeze” of Bitcoin could explain the asset’s recent drop to 53-day lows as miners continue to sell, according to a Bitcoin analyst.

“Speculators kept adding to new long positions, just adding more fuel for more liquidations in a cascading long squeeze,” pseudonymous Bitcoin

BTC analyst Willy Woo wrote in a June 24 X post.

A long squeeze happens when a large number of long-position investors (those betting on a rise in Bitcoin’s price) start selling their holdings as the price falls to cut their losses. This causes the price to drop even more, leading to a cascading effect on other long-position holders.

The opposite is referred to as a short squeeze. This term became well-known when retail traders pumped up the price of GameStop stocks in January 2021, forcing large short investors to buy back the stock at a higher price to limit their losses and thus pushing the stock price up to meteoric heights.

According to CoinGlass data, a dip below $60,000, similar to June 24 when Bitcoin fell below $59,000, would wipe $1.16 billion in long positions. However, a similar 3.73% upward swing would erase $2.18 billion in short positions, showing that traders are currently more confident in the price going downward.

“Worth a breakdown of what’s happening given the fear in the market,” Woo added.

It comes as the Crypto Fear and Greed Index — which measures market sentiment for Bitcoin and the broader cryptocurrency market — tanked to its lowest score in nearly 18 months.

Post-halving miners capitulation continues

Woo also pointed out the ongoing “post-halving miners capitulation” event, which is a theory that miners will turn off their hardware and sell their coins if Bitcoin falls below a certain price and mining becomes unprofitable.

“Superimposed on this liquidation squeeze, we have a post-halving miners capitulation,” said Woo, explaining that miners selling Bitcoin could pay for needed upgrades while the weakest miners are closing shop and being liquidated.”

On June 25, Bitcoin’s price is trading slightly above the crucial $60,000 level, at $61,320 at the time of publication, according to CoinMarketCap data. Bitcoin 'Cascading Long Squeeze' to Blame for Slump to $60K_1

Bitcoin 'Cascading Long Squeeze' to Blame for Slump to $60K_1

Bitcoin is down 2.06% over the past 24 hours. Source: CoinMarketCap

On June 24, Bitcoin saw its biggest daily decline in over three months, dropping 6.26% to $58,890, according to pseudonymous crypto commentator Bitcoin Archive.

“The biggest daily discount in price for 97 days,” they wrote on June 24.

Jan3 CEO Samson Mow believes the “Bitcoin dip is purely sentiment and fear driven, not from selling off large holdings.”

Source: Cointelegraph

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Warren Takunda

Economic

Bond yields were fractionally firmer early Tuesday as investors continued to parse comments from Federal Reserve officials and looked ahead to crucial inflation data later in the week.

What's happening

The yield on the 2-year Treasury added 1 basis point to 4.742%. Yields move in the opposite direction to prices.The yield on the 10-year Treasury rose less than 1 basis point to 4.243%.The yield on the 30-year Treasury climbed less than 1 basis point to 4.372%.

What's driving markets

Treasury yields have stabilized in recent days as investors await fresh catalysts.

A team of economists at Deutsche Bank led by Amy Yang, said recent talk from Fed officials maintained the cautiously optimistic tone from the Federal Open Market Committee around the inflation outlook, leaving the door open for a September rate cut.

"That said, such an outcome likely requires the next few months to show tame inflation readings similar to May and as [Fed Chair] Powell indicated, possibly some softening in the growth and labor market data. We continue to see the first rate cut in December followed by two more in the in the first half of 2025," the Deutsche Bank team added.

To that end, traders will be paying close attention to the personal consumption expenditure price index data, the Fed's preferred inflation gauge, which is due for release on Friday.

Ahead of that, possible bond market catalysts coming Tuesday include:

7:00 a.m. Eastern. Fed Gov. Michelle Bowman gives speech in London on bank capital reform.8:30 a.m. Chicago Fed National Activity Index for May.9:00 a.m. S&P Case-Shiller home price index (20 cities) for April.10:00 a.m. U.S. consumer confidence for May.10:00 a.m. Richmond Fed Index for June.12:00 a.m. Fed Gov. Lisa Cook delivers a speech at Economic Club of New York.1:00 p.m. Result of Treasury auction of $69 billion of 2-year notes.

Currently, markets are pricing in an 89.7% probability that the Fed will leave interest rates unchanged at a range of 5.25% to 5.50% after its next meeting on July 31st, according to the CME FedWatch tool.

The chances of at least a 25 basis point rate cut by the subsequent meeting in September is priced at 67.7%, up from 49.4% a month ago.

Source: DowJones

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Devin

Economic

Britain is in a deep investment hole. Public expenditure is due to fall regardless of who wins next month's election, while business spending is also at a low ebb. To dig the country out of its investment crisis, the party that wins national elections on July 4 has a range of options that could fudge counterproductive fiscal rules.

The policy blueprints published by the ruling Conservatives and opposition Labour Party ahead of the election are long on buzzwords. The former's manifesto pledges "bold action"; the latter's advocates something called "securonomics". But they're short on detail, for a good reason: the numbers don't add up.

Between 2010 and 2023, UK output expanded by an average of 1.6% a year, well below the 2.2% pace between 1979 and 2010. UK GDP will grow by just 0.5% this year, compared to 2.7% in the United States and 0.8% in the euro zone, the International Monetary Fund forecasts. GDP per capita is now lower than before the 2019 election.

The key reason for this stagnation is a collapse in productivity – the output created for each hour worked. The London School of Economics' Centre for Economic Performance found that productivity now is 26% lower than if it had followed its trend between 1979 and 2007. It's also below the U.S., Germany and France. The LSE research shows that Britain's workers didn't receive enough capital – technology, training and machinery. In other words, underinvestment is holding back the UK economy.

Business investment, which accounts for more than half of UK spending that doesn't go on current needs, is around 10.5% of GDP. That ranks an abysmal 28th among the 31 countries in the OECD, according to the Institute for Public Policy Research. And government investment spending has been around 2.5% of GDP on average since 1995, below the 3.4% averaged by G7 advanced economies, the LSE found. Worse, fiscal forecasts set by the current government – and largely embraced by Keir Starmer, leader of the opposition Labour Party – imply public sector investment will actually decline from 2.4% of GDP this fiscal year to around 1.8% in 2028-2029, according to the Institute for Fiscal Studies. UK Investment Crisis Calls for Taxes and U-Turns_1

UK Investment Crisis Calls for Taxes and U-Turns_1

That fall – equivalent to a cut of around 26 billion pounds – is the opposite of what Britain needs. Its schools are falling apart and the UK transport network requires a 22 billion pound upgrade, according to the National Infrastructure Commission. The new government will also have to find ways of encouraging private investment. Fighting climate change alone will cost up to 35 billion pounds a year in private sources of capital until 2050, the NIC said.

The new government, most likely led by Starmer, will have two natural options to deal with these issues: higher taxes or more borrowing. The manifesto says that by 2028-2029 Labour would raise 8.6 billion pounds from the likes of windfall taxes on oil and gas companies and VAT on private schools. But around 5.2 billion pounds would come from reducing tax avoidance – a measure often invoked but rarely achieved by would-be prime ministers.

Those revenues aren't even enough to cover Labour's spending plans of around 9.5 billion pounds a year to pay for measures such as carrying out 40,000 more weekly operations, scans and medical appointments and to create a "Great British Energy" company to fund renewables. And they are certainly not enough to make up for the Conservatives' decision to leave a future shortfall of up to 20 billion pounds a year in public spending across most government departments, according to the IFS. "Protected" areas, including health, defence and education, will receive cash injections, but such an outbreak of austerity would still hit Britain's public services hard.

Starmer and the likely finance minister, Rachel Reeves, have promised not to hunt the big beasts in the fiscal jungle: income tax, corporation tax, VAT and national insurance. They could increase other levies, such as the ones on capital gains or inheritances, but their room for manoeuvre is limited. That's because the current government has already decreed tax rises of 23 billion pounds a year by 2028-2029, according to the Resolution Foundation. Those will further increase Britain's tax-to-GDP ratio from the current 36.5% – the highest since 1949. UK Investment Crisis Calls for Taxes and U-Turns_2

UK Investment Crisis Calls for Taxes and U-Turns_2

The borrowing route is full of roadblocks too. The biggest one is Labour's pledge to abide by the Conservatives' rule that public sector net debt as a percentage of GDP must fall at the end of a five-year rolling period. At present, that leaves the next finance minister with less than 9 billion pounds in extra borrowing capacity by 2028-2029.

It's imperative that Starmer and Reeves avoid unsettling markets in the way former Prime Minister Liz Truss notoriously did in 2022. But there's scope to scrap the arbitrary debt reduction rule and replace it with a fiscal ceiling that is both tough enough but sensible enough to enable investment-focused borrowing. There are three viable options.

The first, and simplest, is to target "headline" public debt, instead of "underlying" public debt. The former takes a more lenient view of the Bank of England's losses on its bond portfolios. As a result, it would give the next government nearly 25 billion pounds in extra borrowing, according to Goldman Sachs.

The second option would be to introduce European-style loopholes. The European Union's new fiscal rules enable governments to dodge them if they spend money on pro-growth investments. The problem is that while messy compromises are second nature in the EU, the UK's fiscal space is policed by the independent Office for Budget Responsibility. The risk is the OBR plays a similar party-pooper role to Germany's Constitutional Court, which last year pegged back Berlin's investment plans.

The third, and most radical, option would be to target "public sector net worth". That yardstick uses corporate accounting methods to measure the difference between the state's assets and its liabilities. Using that metric would give Starmer nearly seven times more fiscal firepower than he has now, according to the OBR.

The Labour manifesto does say that the current rules are "non-negotiable". But faced with the reality of government, Starmer and Reeves may decide that a fiscal U-turn that delivers some 60 billion pounds in extra spending is better than chronic underinvestment, crumbling public services and a stagnant economy.

Source: Reuters

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Samantha Luan

Economic

Statistics Canada is set to release the top-tier Consumer Price Index (CPI) data for May on Tuesday at 12:30 GMT.

The timing of the Bank of Canada’s (BoC) next interest rate cut will depend on the CPI inflation data, significantly impacting the market’s pricing and the value of the Canadian Dollar.

What to expect from Canada’s inflation rate?

The Canadian CPI is expected to rise at an annual rate of 2.6% in May, a tad slower than a 2.7% increase in April. On a monthly basis, the CPI inflation is seen easing to 0.3% in the same period after April’s 0.5% growth. The core CPI showed no growth over the month in April.

Alongside the CPI data release, the Bank of Canada will publish its closely watched core Consumer Price Index data, which excludes volatile items such as food and energy prices. In May, the annual BoC core CPI inflation is seen steady at 1.6%, while the monthly BoC core CPI is set to rise by 0.2%.

Canada’s inflation is likely to stay below 3.0% for the fifth month in a row, although closing in on the central bank's 2.0% target.

Previewing the Canadian inflation report, analysts at TD Securities (TDS) noted: “We look for headline CPI to rise by 0.3% in May on another large increase for shelter as inflation edges lower to 2.6% YoY.”

“Core inflation measures should hold stable at 2.9%/2.6% for CPI-trim/median, translating to a modest acceleration on a 3M (SAAR) basis, but we do not expect the BoC will be overly concerned by this and see a high bar for this print to derail a July cut,” the TDS analysts said.

Markets are widely pricing in another BoC rate cut at the July 24 policy meeting. However, one additional inflation report is due before the next policy announcement.

TDS Director of Economics, James Orlando, said that “it would probably take a bad reading, either this month or next, to stop the Bank of Canada from cutting."

The central bank's Summary of Deliberations revealed last week that Governor Tiff Macklem and his colleagues thought about waiting until July to lower interest rates but ultimately decided to cut earlier at the June 5 meeting.

Following the policy announcement, Macklem said that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2.0% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”

The BoC joined Sweden's Riksbank and the Swiss National Bank (SNB) in reducing rates, followed by the European Central Bank (ECB), making Canada the first nation amongst the G7 countries to adopt the dovish policy pivot. The central bank lowered key policy rate to 4.75% from 5.0% in June, the first cut in four years.

How could the Canada CPI data affect USD/CAD?

The Canadian Dollar (CAD) has paused its recovery from two-month lows of 1.3792 against the US Dollar (USD) in the lead-up to Tuesday’s CPI showdown. Strong S&P Global preliminary PMI data for June from the United States and risk-aversion continue to underpin the US Dollar at the start of the new week, lending support to the USD/CAD pair.

The Canadian Dollar could regain its recovery momentum if the headline and core CPI figures surprise to the upside and squash expectations of back-to-back interest-rate cuts by the BoC. In such a case, USD/CAD could resume its corrective downside toward the 1.3600 level. Conversely, soft CPI data could boost the BoC’s confidence that inflation is sustainably reaching toward its target, reverberating the market expectations for another rate cut next month. In this scenario, USD/CAD could stage a rebound toward 1.3800, as renewed dovish bets could weigh heavily on the CAD.

Dhwani Mehta, FXStreet’s Senior Analyst, offers key technical levels for trading USD/CAD on Canada’s inflation report: “USD/CAD battles the key confluence zone near 1.3690, where horizontal 21-day Simple Moving Average (SMA) and the 50-day SMA coincide. The 14-day Relative Strength Index (RSI) sits just beneath the 50 level, reflecting buyers’ caution.”

“Acceptance above the 21-day SMA and 50-day SMA confluence at 1.3690 could drive USD/CAD back toward the previous week’s high of 1.3765. Further up, the 1.3800 round level will be on buyers’ radars, close to two-month highs of 1.3792. On the downside, a daily closing below the static support near 1.3665 will reopen the door for a test of the 100-day SMA at 1.3619. The next relevant cushion is seen at the 200-day SMA at 1.3586,” Dhwani adds.