FX Update: JPY weakens on BoJ operations. USD tests the brink.

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John Hardy

Head of FX Strategy

Summary:  The yen is sharply weaker again after BoJ lending operations crushed JGB yields overnight while yields actually rose elsewhere. While the JPY was the weakest currency overnight, the US dollar is also weak, punched to new lows versus the Euro and teetering at the brink elsewhere after a strong resurgence in risk sentiment on Friday. The macro calendar this week is fairly light, but we do have preliminary PMI’s up tomorrow, a Bank of Canada meeting Wednesday and US December PCE inflation on Friday.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: BoJ operations take down Japanese yields, weaken JPY. USD at brink with quiet macro calendar this week.

The Bank of Japan offered a trillion yen (around $77 billion) in 5-year loans against collateral to banks as it exercised the expanded lending facility announced at last week’s Bank of Japan meeting. This helped push JGB 5-year yields to new local lows at a time when yields were rising elsewhere after a comeback in US treasury yields on Friday, so the yen was pummeled for further loses, as the currency even fell against a quite weak US dollar and USDJPY traded north of 130.00 today. The loans amount to de facto QE by the Bank of Japan as the lent money is seen headed for JGB’s. The loan offer was some three times over-subscribed. Some speculate that the BoJ is conducting these operations, which included a similar, if far smaller extension of 2-year loans last week, as a way to emphasize control of the portion of the yield curve out to 5-years, possibly in preparation for further widening or abandoning the 10-year yield band. Maybe, for now, the market is reading it as a net easing move. The JPY-cross charts are a mess, with massive churn back and forth in recent weeks. The JPY downside is unlikely to extend in a straight line and it is tough to see any reason that the JPY should accelerate persistently lower unless yields are set for a fresh strong surge higher, one that would coincide with Kuroda’s replacement arriving on the scene and only offering policy tinkering at the margin rather than bringing a more significant overhaul of BoJ policy.

The Euro continues its relative strength on yet another hawkish blast from the ECB’s Klaas Knot at the weekend calling for multiple 50 basis point hikes from here for the ECB. President Lagarde is out speaking later today. The ECB is priced to hike 50 basis points the week after next and for almost another 50 basis points in March before decelerating thereafter (and peak rates are for July at just south of 3.50%). As I noted on today’s Saxo Market Call podcast, it is remarkable that the market has priced the 2y2y yield for Europe (where the 2-year yield will be in 2 years’ time) at only about 15 basis points below the US 2y2y, the tightest this spread has been since 2013. At these levels, this source of relative euro strength (ECB relative hawkishness and playing catchup) is probably largely exhausted.

The renewed EUR strength took EURUSD to new highs above 1.0900 at times today, and EURJPY had nearly come full circle after teasing the key sub-138.00 range support last week, trading above 142.00 at one point today and now not that far from threatening the high of the range (just below 143.00) of the last few weeks since the December BoJ surprise band widening.

Looking ahead at the calendar this week, the US calendar is relatively barren until Friday’s tardy December PCE Inflation data, although we also get a US Q4 GDP estimate on Thursday. Elsewhere, the euro may key off the preliminary January Eurozone PMI’s out tomorrow. And both NZ and Australia report Q4 CPI on Wednesday. Much of Asia is off-line for Lunar New Year celebrations, with China off all week.

EURUSD managed a test to new highs today, buoyed by the strong risk sentiment comeback on Friday, a common coincident indicator with USD weakness, and as the ECB continues to wax hawkish. The next data test for Europe is in tomorrow’s preliminary January PMIs, where the market may be leaning for a positive surprise, given the massive drop in energy prices in Europe in December on milder weather and general signs of resilience. As noted above, the relative ECB-Fed picture is looking stretched, so either the ECB needs to accelerate its hawkishness further or the Fed to wax dovish, which it has resolutely refused to do, even as the market prices rate cuts starting as early as later this year. A minor rejection of the new highs above 1.0900 has set in today, but we’ll need to see an ugly close on the day for a tactical reversal scenario and bears have already been burned by the last modest reversal pattern last Wednesday.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The US dollar remains weakest on our trend score measure, but note the JPY negative momentum as the currency losing altitude the quickest. Sterling somehow finds itself at the top of the pile here, with UK flash PMI’s also up tomorrow. The current calls in the UK to reduce power usage because the wind is not blowing reminds of the fragility of the energy system for now.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURCHF is chopping around trying to figure out if it wants to stay above parity after all, while all USD pairs remain in a negative trend, with silver barely hanging in there. Some JPY crosses are trying to flip to positive, but a look at most JPY-cross charts should scare away any self-respecting trend traders as these are a choppy mess.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 – US Dec. Leading Index
  • 1500 – Eurozone Consumer Confidence
  • 1745 – ECB President Lagarde to speak
  • 0030 – Australia Dec. NAB Business Conditions/Confidence


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