FX Update: Is FOMC priced in? BoJ risk towers above all else.

The ECB is holding an emergency ad hoc meeting due to “current financial conditions” after a prominent speech from ECB board member Schnabel yesterday indicating a limitless commitment to ensure that there are no “disorderly” moves in yields, particularly for peripheral EU economies. The end of QE was always going to be difficult for the ECB, but the fact that they are already out with an emergency meeting less than a week after their regularly scheduled meeting speaks to the sense of panic. The scale and speed of the sell-off in Italian BTP’s with the sharp rise in global yields is clearly behind this move – the ECB perhaps thought that it could bide its time until the fall, but the US yield curve put the pressure on right away. As noted above in the EURJPY chart commentary, it was interesting to see the market reacting with a EURCHF rally due to the improvement in the peripheral spreads, but lower spreads are only a durable positive for the euro if the ECB is able to set up a way to crush spreads that doesn’t prevent a more rapid pace of rate policy tightening in general – a somewhat incoherent policy, even if the ECB’s balance sheet is so vast that if technically speaking, it can still eventually even reduce overall holdings while shifting existing holdings to the periphery to reduce spread volatility. But to do so it would have to move even more aggressively away from old “capital key” principles linking its holdings to the relative size of each member’s economy. Depending on the last of these angles in particular, there doesn’t have to be a strong angle on the euro, provided the rate outlook stays supported.

Finally, I extensively discussed the Bank of Japan meeting risks on Friday (overnight between Thursday-Friday for those of us not in Asia), with thoughts on how to trade this in yesterday’s update, mostly in anticipation that the Bank of Japan will have to give way in some fashion, particularly on a net-hawkish FOMC meeting that takes US yields higher still. For further discussion, have a listen to this morning’s Saxo Market Call podcast. Also, the pressure has built further on the Bank of Japan as speculators are aggressively selling JGB futures, taking the implied yield on these to well above the 25 basis point nominal cap that the BoJ enforces on 10-year JGB yields, and with 10-year rates in 1-year marked well above 50 basis points in forward markets overnight. Beware the risks of discontinuous moves and also beware, as Steen Jakobsen suggested is a scenario for the BoJ,  that Kuroda and company might try some kind of incremental approach – moving the YCC target to 50 basis points or 100 basis points, for example. Sooner or later, the BoJ breaks.

Table: FX Board of G10 and CNH trend evolution and strength.

Risks of discontinuous moves in JPY crosses over the Friday BoJ. Otherwise, noting the broad sterling weakness as GBPUSD dipped briefly below 1.2000 at one point.

Table: FX Board Trend Scoreboard for individual pairs.
Chiefly watching JPY cross status over the next few sessions in terms of new developments, as well as trend check on USD pairs in the wake of tonight’s FOMC meeting.

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