MUFG: FX Weekly - FJElite

The USD has continued to trade close to recent highs against other major currencies over the past week. The USD initially strengthened in response to renewed tensions in the Middle East, but its upward momentum was quickly tempered by the June FOMC minutes. The minutes suggested that the Fed is in no rush to raise rates as early as this month and is instead likely to take more time to assess the evolving inflation outlook. Attention will now turn to the release of the June US CPI report and semi-annual monetary policy testimony from Fed Chair Warsh in the week ahead. If underlying inflation pressures remain contained, it could prompt market participants to scale back expectations for Fed hikes, resulting in a reversal of the recent USD rally. It would also help to reduce pressure on Japanese policymakers to support the JPY. Finance Minister Katayama stepped up verbal intervention this week by stating that the government wants to encourage households, as well as pension funds including the Government Pension Investment Fund (GPIF), to increase their investment in Japanese financial assets. While a significant shift in asset allocation appears unlikely in the near term, the comments have helped to ease selling pressure on both JGBs and the JPY. Over the longer term, however, this policy shift could have more far-reaching implications for domestic capital flows and provide more support for Japanese financial markets.