Citi sees potential for yen (JPY) underperformance

Citi revised its forecast for the first Fed rate cut from July to September following a robust May U.S. labor market report showing 139,000 new jobs added and a 4.2% unemployment rate, figures strong enough to delay expectations of a weaker USD. Despite this, Citi anticipates asymmetric downside risks for the USD in the coming months, citing potential data skew from pre-tariff activities, fiscal risks, ongoing tariff negotiations, and persistent policy uncertainty that could trigger a sell-off in U.S. assets. The firm also suggests potential JPY underperformance while noting decreased FX volatility post-NFP, anticipating range-bound USD trading absent a clear catalyst.

Analysis

The U.S. labor market report for May, revealing the addition of 139,000 new jobs and an unemployment rate of 4.2%, has led Citigroup to project sustained hawkish Federal Reserve pricing and a postponement of U.S. dollar (USD) weakness. Consequently, Citi has revised its forecast for the initial Fed rate cut from July to September. Despite these strong headline figures, Citi underscores significant asymmetric downside risks for the USD in the coming months. These risks are attributed to potential data distortions from pre-tariff activities, which could signal weaker future economic performance, alongside fiscal risks, ongoing tariff negotiations, and persistent policy uncertainty, all of which could potentially trigger a new wave of selling in U.S. assets and the USD. In the absence of a clear catalyst, Citi anticipates the USD may enter a period of range-bound trading, noting that foreign exchange volatility has generally decreased following Nonfarm Payrolls (NFP) reports this year, with average daily ranges tending to decline after Consumer Price Index (CPI) releases. The analysis also points to potential underperformance in the Japanese yen (JPY), suggesting that cross-JPY pairs, including safe-haven pairs such as CHF/JPY and EUR/JPY, are testing upper ranges with the potential for bullish breakouts, although this does not inherently signal a pro-risk market environment. Citi maintains a cautious stance, emphasizing the need for patience while awaiting a shift in hard economic data that could influence future USD movements.

Key Decisions for Investors

• Investors should acknowledge the short-term support for the USD due to revised, more hawkish Federal Reserve expectations, but prepare for potential range-bound trading and maintain vigilance for catalysts that could initiate the anticipated medium-term downside.
• Closely monitor U.S. fiscal policy developments, outcomes of tariff negotiations, and incoming 'hard' economic data, as these are identified as key potential triggers for significant USD weakness and a possible sell-off in U.S. assets.
• Consider tactical opportunities arising from potential Japanese yen underperformance, such as positions in cross-JPY pairs like CHF/JPY or EUR/JPY, while noting that this specific currency view does not necessarily translate to a broader pro-risk market sentiment.