FX Update: BoJ meeting looming large as US CPI focus fades. FX Update: BoJ meeting looming large as US CPI focus fades. FX Update: BoJ meeting looming large as US CPI focus fades.

FX Update: BoJ meeting looming large as US CPI focus fades.

John Hardy

Head of FX Strategy

Summary:  The perfectly in-line December US CPI data left the market grasping at straws and eventually saw treasuries and sentiment rallying as the US dollar sold off, with the Japanese yen leading the charge on the risk for further tweaks at next Wednesday’s BoJ meeting. The market took the 10-year yield well above the 0.50% band limit overnight in anticipation of a further widening, doubling down on the upside pressure on the JPY as yields ease elsewhere.

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

FX Trading focus: BoJ meeting next Wednesday looming large as US CPI focus fades

Yesterday’s December US CPI release and the subsequent market reaction suggests to me that the focus on the chief US inflation data points is likely set to ease on a month-to-month basis. The data was perfectly in-line with consensus expectations for a solid drop on the year-on-year headline and core to 6.5%/5.7%, respectively. And as we discussed on this morning’s Saxo Market Call podcast, it is no secret that the heaviest portion of the core inflation data point is the infamous Owners Equivalent Rent (OER), which has a 32% weighting and is notoriously lagging. Some private measures of rental inflation are already showing month-on-month declines and the year-on-year rises have approximately halved, while the OER data just posted a new high for the cycle in December.

This is not to say that inflation will no longer be in focus, but if it is to crop up as a significant concern again, it will more likely be on signs of aggravated rises in earnings, a reheating services sector, a new spike in energy prices, etc., all of which are in varying degrees of abeyance now. In other words, the incoming data still very important, but the focus will be far more diffuse. The upcoming earnings season, for example, will provide some interesting inputs as companies comment on Q4 trends and set their expectations for the coming quarter.

The strongest currency move yesterday was the rally in the Japanese yen, something that was set in motion ahead of the US CPI release by developments in Japan yesterday. Press reports that the Bank of Japan is set for further policy tweaks, a BoJ survey that upgraded the outlook for several regions in Japan and mentioned wage gains, and a preliminary report from the Ministry of Finance that December saw record selling of foreign bonds by Japanese life insurers were all in the mix. The benign US CPI data helped US treasury yields lower all along the curve, the Fed’s constant protestations notwithstanding, and JPY crosses headed sharply south late yesterday with the JPY posting new highs into the early European session today.

What will the Bank of Japan deliver? The market feels very uncertain but seems to be rushing to err on the side of caution, as 1-week implied volatility for USDJPY is at 21.5%, its highest since the pandemic outbreak and outright an extremely elevated level. This suggests that the Bank of Japan will have to deliver something, whether a hawkish hold or a surprisingly large adjustment to the band or something else to justify the excitement. There are no signs of directional panic in the risk reversals, but downside protection in USDJPY is naturally more expensive (3.3 handles more expensive for 1-week, 10-delta options).

Let’s recall that the December BoJ meeting surprised universally with the lift in the yield “band” – really a cap – to 0.50% from 0.25%. Bloomberg reports that only 1 analyst of the many surveyed is looking for any shift in the policy next week, but again, none expected anything in December either. I haven’t anything to add, other than it is ironic that the Bank of Japan is finally getting around to tightening with commodity prices massively lower and lower still on the strong JPY recover already in the bag, with US CPI data and long bond yields in full retreat and with expectations that a weakening economy will have the Fed cutting by later this year. Anything that opens a path for the Bank of Japan to leave negative rates and set itself on the path to, say, a 1.00% policy rate and an end to yield-curve-control needs a USDJPY reset of about 10-12% (at or below 115.00). For USDJPY to remain where it is or head back higher likely needs a USD liquidity crisis or a huge reheating of the inflation outlook that sees 2024 Fed rate cuts reversed and maybe even a higher terminal rate.

A fresh drop for USDJPY on US yields easing lower post-CPI yesterday and as the market braces itself for a possible further tweak to BoJ policy next week. Could wily Governor Kuroda deliver a nothingburger and leave further tweaks to his replacement in April or does he set up the expectation of another 25-basis point raise of the trading band and maybe a 10 bps hike to 0% at the March meeting, declaring that recent evidence of rising wages is vindication for his policy arc since 2013? For the policy rate, markets are only cautiously pricing an end to negative rates by April and a rate by end-2023 of +29 basis points. The frustrating setup here is that there is still a significant unknown of who will replace Kuroda in just a few months’ time. USDJPY levels include the 126.35 pivot low area (minor) and the bigger psychological level of 125.00 to the downside, while a reversal would need a quick back-up into 132.00 or so after next the Bank of Japan meeting, depending on where we are trading going into that event risk.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY standing almost taller than the CNH here in trending terms, though it was strong across the board yesterday. The USD is finally the weakest of the lot and could weaken further as long as US treasury yields continue to fall and this is celebrated in risk assets. AUD still enjoying the recent CNH strength and the euro may be getting some of its tailwind from hopes of Chinese stimulus as it is China’s largest trading partner.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Most All JPY crosses now have flipped negative after the big impulse yesterday – next Wednesday the big testing ground there. EURUSD has been in an uptrend for 50 days (flipped on November 4 at 0.9957 on the close that day). Easy reversal here technically for some of the USD pairs if yesterday’s move is quickly reversed – looking at you, NZDUSD and USDCAD, as first possible victims is USD not staying down here.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 – US Fed’s Kashkari (Voter 2023) to speak
  • 1500 – US Jan. Preliminary University of Michigan Sentiment
  • 1520 – US Fed’s Harker (Voter 2023) to speak


Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.