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Soft inflation sent NZD broadly lower as traders were reminded that variable CPI data is likely to beep RBNZ in neutral territory, at best.

Annual inflation fell from 2.2% to 1.7% in Q2, missing forecasts of 1.9% and underscoring RBNZ's expectations of variable CPI.

Non-tradable inflation declined from 5.2% to 2.4% YoY, with quarterly moving to 0.2% compared with 1% in Q1. This is also firmly below the 1yr average of 0.5%. Tradable CPI contracted by -0.2% which dragged the annual read back to 0.9% (-1.6% prior).

Whilst RBNZ have hopes for inflation to return to the 2% area (on average) over the medium term, we doubt inflation will pick up to reverse the trend of inflation which has been moving gradually lower since the beginning of the data set. This is a patten which keeps on cropping up on the developed world and one which central banks are yet to truly challenge.

With the Bank of Canada leading the way with a hawkish hike, there had been hopes that inflation would continue to recover in NZ and pile the pressure on RBNZ to tighten. Yet RBNZ had also warned that CPI is likely to be variable throughout the year, so today's soft CPI is just a dose of reality. Also not helping the case for a hawkish RBNZ is the rebound of the TWI; Both RBA and RBNZ see higher exchange rates as a threat to trade, which puts them firmly in a different camp to their commodity peer Canada.

NZDCAD is testing key support from the September 2015 trendline, and we see a downside break as imminent. BoC could raise one more time this year to further narrow the positive carry NZD offers (currently 1%) which is seeing a repricing on bonds and adds further downside pressure to NZDCAD. All RBNZ have to do is remain neutral or begin jawboning and NZDCAD is likely to be a preferred short over the near-term. A break of the trendline may find initial support at the 0.9168 low but we could see this move to 0.90 over the coming weeks if data from Canada continues to outperform expectations.

AUDNZD extended gains to an 8-week high although the RBA minutes and employment data on Thursday will be in focus. With RBA and RBNZ both standing neutral with rising currencies, the odds of jawboning are rising which may take some of the upside pressure away from AUDNZD. Resistance is close by at 1.0746 with key support sitting at today's low of 1.0634. A break of 1.0746 targets the 1.08 handle and 19th May high at 1.0820.

NZD/USD signalling an exhaustion

Price dropped aggressively and looks determined to erase the last day's gains, but is premature to say that we'll start another leg lower. The current decrease is natural after the last week's rally, we'll see what will happen in the upcoming days because the perspective remains bullish at this moment despite a minor decrease.

Has dropped as the USDX has tried to rebound in the fresh start of the week, unfortunately the index is still under massive selling pressure, so we'll have to wait for a reversal signal before we could say that we'll have another leg higher.

USDX found support right above the 95.00 psychological level, at 95.05 level, but we could still drop if the United States data will come in worse than expected. A further USDX's drop will send the greenback much lower versus its rivals.

Price dropped after the failure to reach the 0.7367 previous high, is trading below the 0.7324 static resistance and could drop to test and retest the 0.7277 and the warning line (wl4) in the upcoming days if the dollar index will have enough energy to climb higher.

NZD/USD is showing some exhaustion signs after the failure to reach the 0.7375 swing high, but maintains a bullish perspective after the false breakdown below the red downtrend line.

Is bullish as long as is located above the fourth warning line (wl4) of the former ascending pitchfork, only a valid breakdown below this level will open the door for a larger drop.

We may have a buying opportunity if the rate will test and retest the mentioned support levels because the pair is still located in the buyer's territory.

The greenback will appreciate significantly only if the USDX will find strong support and if will breakout from a potential Falling Wedge pattern. The Kiwi could receive support from the New Zeland CPI, which could increase by 0.2% in Q2.

AUD/USD focused on correction

Price found strong resistance and now is going down on the short term, the retreat is natural after the amazing rally. The correction could be temporary as the rate will come down only to recapture more directional energy to be able to resume the upside movement.

AUD/USD failed to reach and retest the upper median line (uml) of the ascending pitchfork, so the retreat is understandable. Failed also close above the 0.7835 major static resistance, showing that the bulls are too exhausted on the short term. The next downside level will be at the median line (ml) of the ascending pitchfork, could hit also the 0.7755 static support (resistance turned into support).

GOLD still in range

The yellow metal continues to move sideways on the Daily chart, so will be better to stay away till we'll have a valid breakout from this range. The rebound is natural after the false breakdown below the 50% retracement level and after the failure to reach and retest the median line (ml) of the minor descending pitchfork. Is trading above the 1233 level, targeting the upper median line (UML) of the major descending pitchfork and the upper median line (uml) of the minor descending pitchfork.

Remember the Silver flash crash?

Nope, me either!

Let's take a look at the charts to refresh our memory on just what happened:

XAG/USD Daily:

The daily chart shows the drop through trend line support and instant recovery the clearest.

What's key for me here, is the fact that it happened at that confluence of support between the daily trend line and horizontal swing low. The endless stops that would have been just below here added to the already illiquid Asian session trading no doubt compounded the drop.

XAG/USD Hourly:

But after zooming into the hourly, you can now see that price has essentially ignored the flash crash drop and reactivated the daily trend line support level.

With Silver known for its ability to maintain trends after higher time frame support/resistance levels hold, it will be interesting to see if we can get an intraday stepping pattern to build a long around down here.

The US dollar bounced on Monday but the small rebound could be a tell on where the market is going. The Swiss franc was the top performer while the Australian dollar lagged. The day ahead will offer clues on who might follow the BOC with a rate hike. A new Premium short has been issued, based on the charts/patterns below. The identity of the chart has been revealed to Premium members via a new trade.

Every currency has a bad day at times. Even in the less-volatile era of 2017, currencies are beaten up. When those days come – like they did for the US dollar on Friday – how the currency recovers is often more telling then the bad day itself.

The US dollar was broadly higher in light trading Monday but the gains were small compared to Friday's thrashing. It edged up about 30 pips across the board and a bit more against CAD and GBP, but those were the two that made the most headway last week. GBP traders await this week's CPI (Tuesday) and retail sales (Wednesday) figures for more clues on Super Thursday's BoE meeting & Inflation Report.

So the dollar-bounce was modest at best. What does that mean? It shows there is little enthusiasm to own dollars and few dip buyers waiting the wings. But it's not all bad news, at times on Friday the dollar looked like it could crumble. Even when soft Empire Fed data hit on Monday the dollar held its ground.

That means that while the dollar is likely to continue to fall – especially with the lack of data on the calendar – the path won't be in a straight line.

One spot where the dollar is showing more life is against the yen. The stall at 114.50 this month and retracement to 112.50 looks far from fatal and underscores the theme that everyone-is-tightening but the BOJ.

So who will be next to act? We will get some clues in the day ahead with New Zealand reporting on Q2 CPI at 2245 GMT and with the July RBA meeting minutes due at 0130 GMT. Any hints or reasons to raise rates are significant at the moment and the market will be much quicker to react than it was when the BOC signaled higher rates.

Summer Slumber

The Market has tipped their hat to Thursday ECB meeting as the main event, resulting in sleepy markets across most currencies but there have been selective pockets of interest. However, given the lack of Fedspeak support or tier one US economic data the USD, for the most part, remains trading off its back foot. Nonetheless, the market has been busy analysing and given the many currency pair standoffs, are likely over analysing.Welcome to surviving the summer on a trading desk

Despite the intense focus on the this week’s ECB, it’s questionable if much will happen despite the market’s firm Asset Purchase Price ( APP) easing bias.Given the sensitivity of the market to Draghi’s comments, he will likely err on the side of caution and stir the pot as little as possible

Healthcare News

The US health care bill is back in the limelight.The market has immediately reacted to the latest headlines suggesting two more Republicans Senator Moran and Senator Lee will vote no. This headline has massive implications to amend Obamacare and bring a huge element of doubt over the tax reform.Equity futures are wobbling the dollar is selling off.Gold has picked up its allure again given the heightened political risk landscape

EURO

The Euro continues to nudge higher despite the huge risk of Drahi saying little at this week’s ECB which will be construed as dovish The current market discussion suggests September ECB for even Jackson Hole will be the platform announce the APP easing. The market believes there is no coincidence in Draghi’s appearance at Jackson Hole. But the allure to get in front on a Central Bank easing bias is just too tempting for speculators to ignore, so the EURO remains bid and quickly snapped up on dips.

Australian Dollar

After rallying hard post tepid US CPI, the Aussie struggled to gain momentum after a boisterous China data dump and traders were quick to take profits. While the recent constructive price action suggests the markets want to push even higher, traders remain very caution knowing the stronger Aussie is bad news for the economy. It’s a busy week for the AUD with RBA minutes just ahead, Employment on Wednesday and the week then dotted by RBA’s Heath on Wednesday then Debelle and Bullock on Friday. If there’s an opportunity to lean against the recent currency move the RBA will have its chance.

New Zealand Dollar

It appears the USA is not the only country struggling with consumer inflation as NZD Q2 CPI printed lower than expected at 0%QoQ versus 0.2% expected. The currency tanked 50 pips in low liquidity conditions and had struggled to find it footing so far. The RBNZ has supported a cautionary view of both the economy and inflation which is coming now as a reality check to traders in the form of weaker GDP and tepid inflation

The CAD surged after the Bank of Canada (BoC) hiked rates

The Canadian dollar is lower against the US dollar on Monday after the release of lower than expected existing home sales and the release of the US NAFTA renegotiation objectives by the Trump Administration. Oil prices are in decline after the Energy Information Administration (EIA) reported higher US production this year and growing scepticism about the Organization of the Petroleum Exporting Countries (OPEC) production cut deal is actually working offering little support to the loonie.

The CAD will have to wait until Friday to get a major indicator release when the Canadian retail sales and inflation data will be published. For now US political uncertainty and the “America First” objectives of the NAFTA renegotiation could have a negative effect on the Canadian currency.

The loonie had a strong performance last week as the USD retreated as US data disappointed with slow inflation and falling retail sales. The Bank of Canada (BoC) hiked rates for the first time in 7 years after switching the rhetoric in the past month. The market is still pricing in a second rate hike this year, but Canadian inflation and high levels of household debt could change the mind of the central bank.

The USD/CAD gained 0.364 percent in the last 24 hours. The currency is trading at 1.2693 and regained some of the losses from last week. The economic calendar will provide little excitement for trading the pair as few opportunities are scheduled. The loonie got a huge boost last week with a telegraphed rate hike coming to pass in Canada and soft data in the US. Next up for the pair will be more details on the US NAFTA renegotiation objectives and Canadian inflation and retail sales data later in the week.

The Bank of Canada joins the U.S. Federal Reserve as the only two central banks in the G7 to hike rates but also in dismissing the lack of inflation as temporary. The BoC is also moving to a more data dependant rhetoric but markets still price in another rate hike before the end of the year.

A big obstacle for the loonie before the end of the year will be the NAFTA renegotiations slated to begin in late August. The Trump administration would rather tear the agreement and forge a new one, but at the moment is willing to go ahead at the request of Canada and Mexico. If the hard ball tactics of tariffs are any indication it will be a tough negotiation. Mexico has already said that it could walk out if tariffs are part of the new agreement. Regarding timing Mexican officials have said that they expect the negotiations to be done by before the end of 2017 and not drag on for a long time.

US Trade Representative Robert Lighthizer published the NAFTA renegotiation objectives as part of the process to start talks between the three nations in the next 30 days. The US has taken the lead with both Canada and Mexico willing to seat down and review any updates to the trade agreement. The NAFTA pairs will be sensitive to combative comments from the Trump administration head of the start of talks in mid August.

The price of oil lost 1.091 percent on Monday. West Texas Intermediate is trading at $46.15 and Brent at $48.36 after the Energy Information Administration (EIA) published a forecast that the total shale regions oil output in August would rise by 113,000 barrels per day. Total output in the month could reach 5.59 million barrels per day compared with 5.5 in June. Oil prices retreated at the start of the week after gaining more than 5 percent last week.

Energy prices have been dictated by weekly changes in US crude inventories and reports from the Organization of the Petroleum Exporting Countries (OPEC) led production cut agreement. Oil rigs have increased production in the United States taking advantage of the stability provided by the production cut deal. Demand specially in China is giving optimistic signals to producers and could be the tie breaker between the two opposing forces. Oil producers that are part of the agreement will meet in Russia on July 24 to discuss the current market situation and review the compliance levels.

The GBP/USD lost 0.344 in the last 24 hours. Cable is trading at 1.3055 ahead of the release of the British consumer price index. BoE doves have thrown cold water to the idea of a rate hike even as inflation continues to heat up, but the pound has gotten support from a softer more conciliatory approach to Brexit from PM May. Acknowledging there will be a bill to settle after the UK leaves the EU could result in a more amicable divorce reducing the probabilities of the worst case scenario outcomes.

Investor surveys point to a 81 percent expectation of a rate hike within 12 months with the market pricing in around 50 percent in the next six months.

Brexit negotiations kicked off in Brussels as the UK Secretary of State in charge of steering Britain out of the European Union pledged to get down to work. The pound has lost ground ever since the outcome of the referendum was announced and the full economic reality of leaving the EU has not been totally priced in as March 2019 is a more concrete deadline. After securing a majority the cabinet of David Cameron followed through on a campaign promise and put forth the decision to remain or exit at the hands to the people. The outcome of that decision not only terminated his political career, but has put in jeopardy his successor as Theresa May misjudged the electorate when seeking to build on that majority only to see it reduced by calling a snap election. The results leave a less than unified front when negotiations kicked off in Brussels with various rumours of infighting in the cabinet and the fate of the British economy in the air.

Market events to watch this week:

Tuesday, July 18
4:30 am GBP CPI y/y

Wednesday, July 19
8:30 am USD Building Permits
10:30 am USD Crude Oil Inventories
9:30 pm AUD Employment Change
Tentative JPY Monetary Policy Statement

Thursday, July 20
Tentative JPY BOJ Outlook Report
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
4:30 am GBP Retail Sales m/m
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims

Friday, July 21
8:30 am CAD CPI m/m
8:30 am CAD Core Retail Sales m/m

Brexit depreciated pound increasing cost of living for Britons

The pound is trading near 10 month highs after the UK government led by Prime Minister Theresa May acknowledged the financial obligations to the European Union after Britain is allowed to exit. The message was seen as a less combative tone than was seen earlier which could actually produce a better outcome as the probabilities of a trade agreement rose. The Brexit referendum vote had a surprise outcome with uncertainty putting downward pressure on the pound as imported goods become more expensive overnight and inflation shot up.

The drop in the pound has hit British households as the pace of inflation has outgunned wage growth, leaving real wage growth in negative territory for 2017. The Office for National Statistics will publish the British consumer price index (CPI) on Tuesday, July 18 at 4:30 am EDT. Inflation was 2.9 percent last month and analysts are forecasting a repeat of that print, but there is risk it could end up at 3 percent.

The Bank of England (BoE) has been divided on how the central bank should deal with current economic conditions. BoE Governor Mark Carney and Deputy Governor Ben Broadbent have been vocal about keeping rates at current levels despite rising inflation. Hawks lost an important member when Kristin Forbes left the rate setting committee in June with a final 5 to 3 vote to keep rates unchanged. Chief Economic Andy Haldane is on the rate hiking camp but will have to recruit more votes to his side and if inflation persists at current high levels that could happen sooner rather than later.

The GBP/USD lost 0.344 in the last 24 hours. Cable is trading at 1.3055 ahead of the release of the British consumer price index. BoE doves have thrown cold water to the idea of a rate hike even as inflation continues to heat up, but the pound has gotten support from a softer more conciliatory approach to Brexit from PM May. Acknowledging there will be a bill to settle after the UK leaves the EU could result in a more amicable divorce reducing the probabilities of the worst case scenario outcomes.

Investor surveys point to a 81 percent expectation of a rate hike within 12 months with the market pricing in around 50 percent in the next six months.

Brexit negotiations kicked off in Brussels as the UK Secretary of State in charge of steering Britain out of the European Union pledged to get down to work. The pound has lost ground ever since the outcome of the referendum was announced and the full economic reality of leaving the EU has not been totally priced in as March 2019 is a more concrete deadline. After securing a majority the cabinet of David Cameron followed through on a campaign promise and put forth the decision to remain or exit at the hands to the people. The outcome of that decision not only terminated his political career, but has put in jeopardy his successor as Theresa May misjudged the electorate when seeking to build on that majority only to see it reduced by calling a snap election. The results leave a less than unified front when negotiations kicked off in Brussels with various rumours of infighting in the cabinet and the fate of the British economy in the air.

The price of oil lost 1.091 percent on Monday. West Texas Intermediate is trading at $46.15 and Brent at $48.36 after the Energy Information Administration (EIA) published a forecast that the total shale regions oil output in August would rise by 113,000 barrels per day. Total output in the month could reach 5.59 million barrels per day compared with 5.5 in June. Oil prices retreated at the start of the week after gaining more than 5 percent last week.

Energy prices have been dictated by weekly changes in US crude inventories and reports from the Organization of the Petroleum Exporting Countries (OPEC) led production cut agreement. Oil rigs have increased production in the United States taking advantage of the stability provided by the production cut deal. Demand specially in China is giving optimistic signals to producers and could be the tie breaker between the two opposing forces. Oil producers that are part of the agreement will meet in Russia on July 24 to discuss the current market situation and review the compliance levels.

Market events to watch this week:

Tuesday, July 18
4:30 am GBP CPI y/y

Wednesday, July 19
8:30 am USD Building Permits
10:30 am USD Crude Oil Inventories
9:30 pm AUD Employment Change
Tentative JPY Monetary Policy Statement

Thursday, July 20
Tentative JPY BOJ Outlook Report
Tentative JPY BOJ Policy Rate
2:30 am JPY BOJ Press Conference
4:30 am GBP Retail Sales m/m
7:45 am EUR Minimum Bid Rate
8:30 am EUR ECB Press Conference
8:30 am USD Unemployment Claims

Friday, July 21
8:30 am CAD CPI m/m
8:30 am CAD Core Retail Sales m/m

Gold has started the week with gains. In Monday's North American session, spot gold is trading at $1234.23 per ounce. In economic news, the sole US indicator on the schedule, the Empire State Manufacturing Index, softened to 9.8 points. This was much weaker than the estimate of 15.2 points.

The gold rally has continued on Monday, after posting strong gains of 1.4% last week. The metal moved higher on Friday, taking advantage of weak consumer inflation and spending data in June. CPI edged up to 0.0%, short of the forecast of 0.1%. Retail Sales declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it's no surprise that weak spending has also meant weak inflation, despite Janet Yellen's claim that low inflation is a temporary phenomenon. The US economy had a weak first quarter, with growth of just 1.4%. If second quarter numbers follow suit, investors' risk appetite could diminish and gold could move upwards.

Inflation levels in the US remain stubbornly low, but the Federal Reserve remains convinced that it's only a matter of time before inflation levels move higher. This stance was reiterated by Fed Chair Janet Yellen last week, as she testified before congressional and senate committees. With the labor market close to capacity and the unemployment rate at just 4.4%, economists are puzzled why this hasn't pushed inflation to higher levels. In her testimony, Yellen admitted that the Fed was at a loss to explain the lack of inflation, but insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". Is Yellen's argument just wishful thinking? The markets aren't buying in to the Fed spin, with the odds of a December hike at just 43%, according to the CME Group.

GBP/USD has paused after posting strong losses on Friday. In the North American session, GBP/USD is trading at 1.3060. In economic news, there are no major events on the schedule. British Rightmove HPI rebounded in July, posting a small gain of 0.1%. Last month, the indicator declined 0.4%. In the US, the Empire State Manufacturing Index softened to 9.8 points, much weaker than the forecast of 15.2 points. On Tuesday, the UK releases a host of inflation indicators, led by CPI, which is expected to remain steady at 2.9%.

The first full round of Brexit talks began on Monday in Brussels, as Britain and European Union members square off to begin substantive negotiations on Britain's exit from the EU. After weeks of "discussion about what to discuss", the UK agreed to the European demand that the negotiations would focus on the rights of EU citizens in the UK and Britain's bill for leaving the EU, before entering talks on a new trade agreement. Britain has presented its position on guaranteed rights for EU citizens living in the UK, but EU negotiators have said that this offer doesn't go far enough. The EU has handed Britain an exit bill of EUR 69 billion, and although the May government has agreed that it owes funds to Brussels, it certainly will counter with a much lower figure. With significant gaps between the parties on both of these issues, the negotiations promise to be difficult. Another complication is internal dissent within the May government, with senior officials at odds over a 'transition period' Britain after leaving Brexit. Finance Minister Philip Hammond has suggested a transition period of two years, but Brexit Secretary David Davis has said he wants the UK completely out of the single market when Brexit negotiations terminate in March 2019.

The US labor remains close to capacity and the unemployment rate is sparkling, at just 4.4%. So why is inflation mired at low levels? Economists are puzzled, and the Federal Reserve is also at a loss, although Fed Chair Janet Yellen insists that it's only a matter of time before inflation moves higher. In testimony before a Senate committee last week, Yellen insisted that it was "premature to conclude that the underlying inflation trend is falling well short of 2 percent", and that with a strong labor market "the conditions are in place for inflation to move up". However, the markets remain skeptical that the Fed will make a move before the end of the year, with the odds of a December hike at just 43%, according to the CME Group.

In the US, consumer inflation and spending numbers for June were sluggish. CPI edged up to 0.0%, short of the forecast of 0.1%. Retail Sales declined 0.2%, missing the estimate of 0.1%. This marked the third decline in the past four months. Consumer spending accounts for 2/3 of US economic activity, so it's no surprise that weak spending has also meant weak inflation, despite Yellen's claim that low inflation is a temporary phenomenon. The US economy had a weak first quarter, with growth of just 1.4%. If the second quarter follows suit, investors could sour on the US dollar, and the pound could take advantage and move higher.

We expect the Bank of Japan (BoJ) to maintain its 'QQE with yield curve control' policy unchanged at its monetary policy meeting ending on 20 July. It is widely expected that the BoJ will keep its monetary policy unchanged, especially after it earlier this month demonstrated its strong commitment to yield curve control by announcing an unlimited fixed-rate purchase of 10Y JGBs. The announcement should not have any significant impact on price actions.

Economy improving…

Since the previous BoJ meeting, data have been a little mixed. Exports, which have been the primary driver of economic growth in Japan for the past couple of years, showed weakening signs in Q2 following a few impressive quarters. However, Japanese exporters enjoyed a tailwind from the weak JPY in Q2 and in the recent Tankan business survey large enterprises were increasingly upbeat on exports, although expectations on domestic sales are actually the key driver in the better survey. Domestic demand has shown signs of improvement recently, with both retail sales and consumer confidence looking fairly good. The BoJ's latest outlook report from late April showed expected 1.6% growth in real GDP for the fiscal year 2017, which would mean a further increase in the already-positive output gap. We could see a slight upward revision of this forecast on Thursday.

…but inflation outlook remains low

While the real economy is improving, consumer price inflation (CPI) has remained very low and we expect the BoJ to cut the outlook for CPI excluding fresh food (the measure BoJ targets) for the fiscal year 2017 from the current 1.4%. Inflation has increased in 2017 but it still stood at only 0.4 % y/y in May and wage inflation remains very low. Almost three decades of very low inflation mean companies are reluctant to raise prices and are trying to cut back on services and streamline their operations instead. The Tokyo inflation index, which follows the overall index closely, was completely flat year-on-year in June and, even though the labour market is still running hotter with the jobs to applicants ratio setting a new record each month, it looks as though it could still be a while before inflation begins to take off and the BoJ needs the global economic recovery to stay on track for this to happen.

Rising political uncertainty the main risk to BoJ's policy

The BoJ has explicitly promised to continue easing until inflation expectations are above the 2% target on a sustainable basis. In our main scenario, we expect the BoJ to keep its policy unchanged throughout our 12M forecast horizon, assuming that BoJ governor Haruhiko Kuroda is reappointed when his current term as governor ends in April 2018.

The main risk to the BoJ's currently extremely accommodative policy stance is Prime Minister Shinzō Abe's plummeting approval rating. Recently, it has tumbled to around 35% in the wake of a series of scandals involving Prime Minister Abe and his close political allies and accusations that he used his influence to secure the approval of a new department at a university run by a close friend.

While a possible change in the political leadership is not likely to affect monetary policy in the short term, a further increase in political uncertainty could potentially lead to a repricing of the BoJ further out on the curve, if markets start to speculate that Abenomics is coming to an end. The next important election is not until the general Lower House election in December 2018 and Abe thus still has time to regain voters' trust. According to some media, Abe is planning to reshuffle his Cabinet at the beginning of August. However, this theme could potentially develop over the autumn and represents a downside risk to EUR/JPY and USD/JPY, if further scandals emerge or October's by-election in the Shikoku area turns into defeat.

FX outlook: EUR/JPY and USD/JPY higher 6-12M

The JPY has weakened significantly over the past month, as the BoJ (in contrast to the ECB, BoC and Bank of England, which all recently changed their communication in a more hawkish direction) remains on easing bias and recently demonstrated its commitment to its yield curve control.

According to the latest IMM data, non-commercial JPY positioning is now back in stretched short territory, suggesting that the JPY sell-off is likely to lose momentum in the short term. However, we expect the JPY to continue to underperform vis-à-vis the USD and EUR in a scenario with rising global yields and, given the relatively soft pricing of the Fed, both in terms of rate hikes and balance sheet reduction, we expect relative monetary policy to support USD/JPY in coming months, targeting the cross at 114 in 1-3M. See FX Forecast Update: A 'Sintra accord'? Maybe, but it has yet to be signed by the Scandies (14 July).

In respect of EUR/JPY, we expect the cross to trade in the range of 127-131 in the coming months, targeting 128.8 in 1-3M. We expect the ECB to deliver only a minor hawkish twist at its July meeting, which, if anything, could add to the upside risks for EUR/JPY. See ECB Preview: Another minor hawkish twist (14 July). Longer term, we expect EUR/JPY to continue higher driven by real interest rates and portfolio outflows out of Japan, as we expect the ECB to move towards monetary policy 'normalisation' before the BoJ. We target EUR/JPY at 133.4 in 6M and 136.88 in 12M.

According to Danske Bank's MEVA model, EUR/JPY still trades below the model's fair value of 133. Hence, from a fundamental point of view, the case for further EUR/JPY gains remains intact for now. See FX Strategy: Danske G10 MEVA – EUR/USD gravitational pull kicks in (10 July) for details.