The Japanese yen experienced an early increase in value following Japan’s Upper House election results. Prime Minister Ishiba’s coalition lost its majority, both in the Upper House and in the previously lost Lower House, causing political uncertainty in Japan. The USD/JPY exchange rate briefly fell below 147.80 but rebounded above 148.60 before stabilising between 148.30 and 148.55. The Japanese markets were closed for the Marine Day holiday, which affected yen liquidity.
New Zealand’s second-quarter inflation data showed the annual CPI rising by 2.7% year-on-year, slightly below expectations. Quarterly CPI increased by 0.5%, again below expectations. The NZD/USD dropped, reaching lows of around 0.5940. The Reserve Bank of New Zealand’s Sectoral Factor Model indicated inflation easing to 2.8% year-on-year. Non-tradeable inflation fell to 3.7%, supporting the potential for an August rate cut.
People’s Bank Of China Rates
The People’s Bank of China maintained its Loan Prime Rates:
1-year LPR at 3.00%
5-year LPR at 3.50%
Major currency pairs remained relatively stable, trading in narrow ranges. In the stock market, Hong Kong’s Hang Seng index rose by 0.3%, while Shanghai Composite increased by 0.4%. Japan’s Nikkei 225 was closed due to the holiday.
The political gridlock following the election loss for Ishiba’s coalition introduces significant uncertainty for the yen. We saw this confusion in the initial dip and sharp reversal in USD/JPY, a classic sign that the market is repricing risk. We believe buying volatility through USD/JPY options, like straddles, is the prudent move, as one-month implied volatility is currently sitting just under 10%, which may not fully reflect the potential for sharp policy-driven moves.
New Zealand’s Economic Outlook
New Zealand’s softer inflation figures, particularly the drop in the non-tradeable component to 3.7%, strengthen the case for a central bank policy change. Market pricing now implies over a 75% probability of an interest rate reduction in August, suggesting a clear path for the currency. Consequently, we see value in positioning for further kiwi weakness by purchasing NZD/USD put options or establishing bearish risk reversals.
The decision from China’s central bank to hold rates steady signals a preference for stability over aggressive stimulus for now. This aligns with recent mixed economic signals, such as the Caixin Manufacturing PMI hovering just above the 50 mark, indicating sluggish growth. For traders, this could mean selling covered calls on Hang Seng index trackers, capitalizing on the expected range-bound price action.
