Investor’s Insights 10/07/2023–16/07/2023
This newsletter is intended for educational purposes only. The author is not liable for any potential losses, realised or unrealised, of the reader should the reader decide to invest, speculate, hedge or engage in any financial activities based upon the information here. The reader shall do his or her own research and bear the risks should he or she intend to invest.
Hello, let’s get started on this week’s newsletter. I had been busy as I was called up for reservist, hence there were no publications over the past two weeks.
Geographical breakdown
USA
USA’s CPI print was released for June 2023 last week.
USA’s actual CPI for June 2023 came in at 305.109, lower than the consensus of 305.219 and TradingEconomics’ (TE) forecast of 305.79. This implies that the Fed might continue the pause of rate hikes going forward, or even start cutting rates as early as Q4 2023 because inflation seems to be getting under control now.
Now, we can see from the above chart that inflation has been steadily decreasing over several months. Furthermore, actual inflation rate came in at 3% slightly lower than the consensus of 3.1% and TE forecast of 3.2%. This further consolidates the notion that we are entering a ‘risk-on’ phase as mentioned in my previous issue.
Overall, optimism is high because the main problem of the past few years, inflation seems to be inching closer towards the general goal of most Central Banks at 2–3%.
Building permits in the USA has started to creep up again, suggesting long-term confidence is increasing.
Over the past 5 days, S&P500 has creeped up from 4394 to 4505 steadily and is likely to increase in the near term, given the high level of optimism. Moreover, several developed countries’ have appreciated against the USD.
For example, USD/JPY went down to 138.7 while USD/SGD went from 1.34 to 1.32. The phenomenon of the USD depreciating is not surprising following the cooler than expected CPI release because the markets are pricing in the fact that the probability of the Fed raising rates has dropped. Since inflation in most other countries are still relatively higher than in the USA, it is likely that other countries will continue to hike rates in the short term, meaning that there is an expected interest rate differential, leading to carry trades in the currency markets.
UK
As for the UK, inflation for May 2023 is still persistent at 8.7%, higher than the consensus of 8.4% and TE forecast of 8.5%. As the BOE has set the target inflation rate at 2%, it is likely that the BOE will continue to hike rates.
As of now, it is expected that the BOE may hike to 5.5% which may potentially be a chance to long GBP/JPY. Moving on to Japan now.
Japan
Japan’s inflation of 3.2% is lower than consensus of 4.1% but higher than BOJ’s target, hitting the highest in several decades. Currently, there are mixed signals regarding what the BOJ’s next move will be. However, as the headline from Bloomberg suggests, the BOJ might raise the 10Y yield ceiling to 1%, effectively raising rates albeit only a little. Still, short term interest rates in Japan of 2Y and below are still negative.
As such going long GBP/JPY is possible, although there is still substantial risks and more monitoring of the situation in Japan is still required.
