US-China US-China US-China

FX Update: Further spike lower in JPY brings forward mean reversion.

Forex 4 minutes to read
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John Hardy

Head of FX Strategy

Summary:  Another runaway spike lower in the yen today may herald the last phase of a JPY weakening here as the move today will quickly invite an official response if it continues with anything resembling the same force. It is an important week ahead with the end of quarter and Japanese financial year on Thursday and with a few interesting US macro data points through the Friday March jobs report.


FX Trading focus: Fresh spike beginning of end of JPY weakness? Also, the week ahead.

The JPY lurched into an aggravated weakening move today after US treasury yields ripped higher on Friday and then followed through higher still in today’s session to start the new week. Friday saw some mixed messages from the Bank of Japan, which endorsed its current dovish strategy and even claimed that a weak JPY remains an economic boost to the economy, while suggesting it is watching the JPY carefully, with Japan’s Ministry of Finance also weighing in against “disorderly” moves. But the BoJ failed to announce a new auction late last week to actually defend the 0.25% yield cap on 10-year JGB’s when the yield level had reached 0.23% already on Thursday, the same level at which a prior operation was announced. Instead, the BoJ waited until today to announce unlimited backing for the 10-yr JGB’s, a move that aggravated fresh declines in the yen. I have a hard time imagining that this can continue at today’s breathtaking pace (at more than 2% devaluation of the JPY at its worst point today) without a strong check from Japanese officialdom. Stay tuned, in the meantime, maximum danger for trading JPY crosses here.

The JPY volatility noted above adds to the disquiet around the nearly frozen USDCNY exchange rate, as the tension builds between within Asia, with AUD and CNY in the strong column and JPY spiraling into the void. As I also noted Friday, China will try to maintain a firm grip on its exchange rate as long as commodity prices are this elevated.

Bank of England Governor Andrew Bailey was out today with “two-way” rhetoric on inflation, as he frets the same themes that were discussed at the most recent BoE meeting, namely the risk that real GDP growth outcomes look poor as incomes won’t keep pace with rising input prices. He is even using the phrase a “real income shock”. The UK forward curve is predicting as series of further rate tightening moves followed by an eventual series of rate cuts beginning sometime next year (!).

The week ahead has a few data points worth tracking, including the US Conference Board Consumer Confidence number tomorrow. Traditionally, the most relevant coincident indicator for this survey has been the job market, which by all accounts is strong in the US, but inflation concerns are mounting and will watch for contagion into this survey after inflation- and purchasing decision related questions in the University of Michigan Sentiment survey have knocked the levels back to the low end of the range since the global financial crisis. Other highlights include the Feb. PCE inflation number on Thursday and the jobs/earnings data for March on Friday.

Chart: GBPJPY
If the Japanese yen is in part being punished for its reliance on commodity imports, investors should also consider the same effects on sterling, as the UK was already running semi-dire trade deficits before this last winter of spiking energy prices, aggravated by the war in Ukraine, made a bad situation worse. As well, “real” interest rates (inflation less policy rates) are far more negative in the UK than in Japan, even if the purchasing power vis-à-vis commodities is currently hitting Japan harder due to its weak currency. This valuation above 160 looks very rich – not that it can’t extend further in the near term, especially if long yields continue higher as well, but watching these JPY pairs closely as the Japanese financial year comes into view on Thursday and as current levels of volatility may soon be unacceptable to Japan’s political leadership.

28_03_2022_JJH_Update_01
Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Readings continue to get more extreme – mean reversion risks rising, as noted above.

28_03_2022_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Getting some strong mean reversion intraday in JPY crosses – but too early to call any kind of turn – watching the status of the gold attempt to turn back higher as well here after the sell-off today is trying to reverse as of this writing – if gold can’t pull back higher today, the chart looks bearish for XAUUSD at least tactically.

28_03_2022_JJH_Update_03
Source: Bloomberg and Saxo Group

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