SWEDEN: Latest Polls Show Little Change Over The Summer, Red-Green Leads (1/2)

USDJPY continues to consolidate above the 162.00 handle, and overnight traded highs came within 25 pips of the 162.84 July 1 cycle highs and bull trigger for the pair. Clearance of this level would confirm a resumption of the dominant uptrend and open 164.22, the top of a bull channel drawn from the Feb 12 low. Key support is 160.85, the 50-day EMA.

• One key domestic driver for the pair which resurfaced last Friday has been commentary on potential tweaks to domestic savings plans and GPIF allocations. However, Japanese Finance Minister Katayama indicated the government cannot directly intervene in or force GPIF portfolio adjustments - potentially containing the impact of any policies yet to come.

We summarize analyst views on the potential measures below:

• Deutsche Bank: Local investors including the GPIF considering domestic assets more is "a key reason that our medium-term forecasts look for the yen to rise from record lows. This could be a big step, though we'd want to see more (concrete policies, or a change in flows) before calling for notable yen strength"
• Goldman Sachs: "We have argued that macro impulses clearly are pushing towards further Yen weakening, but meaningful repatriation flows – if they occur – could be one of the most credible of several paths that lead to the Yen eroding its severe undervaluation [...] big changes look unlikely before 2030"
• JP Morgan: "Katayama’s comments should have a powerful signalling effect, and any sustained shift in pension-fund behaviour toward domestic assets could be significant for JPY over time. JPM added USD/JPY downside exposure over the coming months"
• MUFG: "These policy shifts take time and ultimately, we would argue there remains an important fundamental fact that needs to fall into place in order for pension funds and other investors to send less capital abroad and invest more in JGBs – confidence in the BoJ and reduced fears over the BoJ being behind the curve. So we are unlikely to see any notable shift any time soon."
• Rabobank: "While the MoF has hinted that repatriation could be part of a move to strengthen the JPY, the outlook for JGB supply and inflation will likely continue have a strong bearing on asset allocation choices for domestic funds."
• UBS: "While the potential size of these flows is large enough to matter for FX markets, we remain sceptical that they will translate into meaningful near-term JPY appreciation. Asset allocation changes would require lengthy processes, and the core driver of yen weakness—Japan's fiscal/monetary policy mix—remains intact. The direction of travel still favours a weaker yen, but headline risk around possible further policy announcements suggest the risk-reward of aggressively adding to JPY shorts has become less attractive."

Gilts have reversed most of the early sell off after Iran stressed that diplomatic channels with the U.S. remain open despite the escalation seen over the weekend.

• Brent and TTF futures have closed their respective opening gaps higher, with gilt futures closing their gap lower.
• Gilt futures -20 at 87.18 vs. overnight lows of 86.82.
• Futures -45 at 86.93 vs. lows of 86.82. Last week’s low (86.42) is untested.
• Zooming out, a bear cycle remains intact. Recent weakness has resulted in a breach of 86.95, the 61.8% retracement of the May 15-Jun 25 bull leg. This paves the way for an extension towards 86.20, the 76.4% retracement point. Initial firm resistance has been defined at 88.07, the Jul 10 high. A clear break of this hurdle is required to signal a possible reversal.
• Yields ~2bp higher across the curve, 5.00% capped the move higher in 10s this morning.
• SONIA futures pare the bulk of the hawkish move, last flat to -3.0. 41bp of hikes priced through year-end.
• A reminder that Andy Burnham will officially become PM today. Weekend reports have focused on Burnham looking to address the increased cost of living, in addition to providing Downing St. with increased control over policy, reducing reliance on departments such as the Treasury. Local press reports suggest Burnham will speak at ~12:30 London.
• Further out, a heavy UK calendar will see inflation, labour market, retail sales, public finance and flash PMI data released in the coming days. Expect our usual CPI & labour market preview later today.