Daily Brief Macro: Hyun Song Shin on How Big the Yen Carry Trade Really Is and more

• The carry trade involves borrowing in lower yielding currencies like the yen and investing in higher yielding assets
• The recent unwind of the carry trade caused temporary market stress, but quickly settled down
• The actors involved in the carry trade range from speculators to institutions, making it a diverse ecosystem with varying motivations and impacts

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• Japan’s core CPI rose 2.7% YoY, coming in higher than 2.6% in June. However, its core core CPI slowed down, rising by 1.9% compared to 2.2% in June.
• In July, BoJ’s core CPI came in below 2%. Yet the central bank maintains its hawkish stance given the rising wages and rebound in consumer spending.
• With the US Fed signalling a readiness to lower rates and the BoJ maintaining its hawkish stance, the yen is poised to strengthen.

• Hang Seng rose by 1.58%, with most increase on Friday, while S&P500 treaded down by 0.19%
• We believe Hang Seng is in swing market from 16000 to 18000, so as it closes near 18000, we have closed our long position and shift to short call position.
• S&P is more difficult to track as the market is volatile before the anticipated September rate cut.

• Banco de México (Banxico) presented its Quarterly Report yesterday, in which it reinforces the idea that the rate cut on August 8th was justified by the current economic slowdown and the expectation that the price increases experienced by agricultural products during June and July will be reversed.
• In this context, the Central Bank lowered its growth forecast from 2.4% to 1.5% for this year and from 1.5% to 1.2% for 2025.
• This, along with the expected decrease in headline inflation to 4.4% during the fourth quarter of the year and the statements from the Board of Governors on the need to adjust the restrictive stance, supports our belief that Banxico plans to cut its reference rate in November and December.

• Headline EA inflation reassuringly matched consensus expectations by slowing 39bps to 2.2% in Aug-24 on energy price falls, with relatively small and neutral national surprises.
• A rebound in services inflation offset goods price weakness again to keep the core at 2.84%. Resilience here isn’t worrying enough to prevent further interest rate cuts.
• Broader stability in the forecast seems more relevant to the ECB, who should cut again while welcoming the reversal of the upward revisions after July’s upside surprise.

• China companies may start to repatriate F/X deposits held offshore as the CNY gains start to pick up. 
• The sudden unwind of the JPY carry trade reversed the weakening pressure of the CNY against its daily fixing.
• Forward markets are showing a more rapid strengthening of the CNY than analysts estimates.

• Coral sand / In Depth: Ambiguous reef protection laws leave China’s coral sand traders high and dry
• Macao /: Macao’s former top judge announces leadership candidacy
• Investment banks /: Former Haitong executive in crime probe arrested after fleeing to Laos

• The week ended quietly with few notable data releases, which conformed to expectations. Market pricing consolidated recent gains, breaking some bullish trends.
• The upcoming week begins with US Labor Day and ends with the release of payrolls, potentially dismissing hopes for a 50bp rate cut.
• There is an expectation of a third consecutive 25bp cut from the Bank of Canada, with policy announcements also expected in Chile and Malaysia.

• Fed likely ease by more than the ECB and BOE by June 2025, given pro-activeness from the Fed and also big gap in the current policy rates. 
• We see 175bps of cuts by end June 2025.  ECB hawks however are unlikely to reach a consensus on the 21 person governing council from delivering consistent quarterly 25bps rate cuts.
• Finally, we see the view on the BOE MPC shifting, as disinflation proves to be greater than the BOE consensus.