FX Trading focus: Bank of Japan puts JPY back on tilt, Riksbank lights fire under SEK
Going into the BoJ overnight, my expectation bias was that the Bank of Japan would have to loosen up its forward guidance in some meaningful way, even if very cautiously so. Kuroda and company could have taken the opportunity, for example, to indicate a two-way policy potential: on the one hand suggesting that for now it expects inflation will prove transitory and that it is happy with its current policy mix, but that if global yields continue to rise at anything resembling the recent pace and inflation – for cost of living expenses, particularly those driven by a weaker JPY – it may have to adjust its yield-curve-control policy in future meetings. The government’s recent fiscal package aimed at offsetting cost-of-living increases for vulnerable households is a clue that the weak JPY is weighing politically ahead of important lower house election in July. Instead, the BoJ meeting overnight saw Kuroda and company doubling down on the current policy mix and even announcing daily auctions with unlimited backing of the 0.25% 10-year yield cap.
Ironically, if global yields stagnate here and we avoid any new drama in energy prices, the pressure on the JPY could subside rather quickly, as the big devaluation story needs fresh fuel and a rise in yields elsewhere if the JPY is to remain under significant further pressure. The Japanese Ministry of Finance was out tempering the JPY decline with some sharp comments early today in Europe, but intervention would be silly and even more politically toxic perhaps than the MoF getting on the phone with Kuroda and twisting his arm to loosen up monetary policy guidance. Either way, Japan absorbs the pressure – whether it is on the currency and inflation of imported goods or via a rise in yields.
Elsewhere, the USD pressure on global liquidity continues to ratchet higher and higher, with the USDJPY move overnight helping to jolt USDCNH and USD/everything-else higher as well. Some bit of relief on that front in early European trading today, but that is quickly being erased as I am writing this (GBPUSD even hitting new lows). The USD strength is rapidly on its way to becoming an emergency for global liquidity if this move extends much longer. The April price bar for EURUSD, GBPUSD, AUDUSD etc. shows the powerful momentum that has developed and the Fed is in no mood to help, with domestic inflation considerations first and foremost in its sights. This may end in coordinated intervention at some point if the Fed doesn’t blink at next Wednesday’s FOMC meeting.
USDJPY exploded all the way through the 130.00 level and to 131.00 on the Bank of Japan refusing to change its policy mix at a time when virtually all other central banks are in a strong tightening regime, with USD liquidity concerns adding further energy to the fresh surge overnight. The natural focus is on the early 2000’s high above 135.00, but there is nothing holding the pair back from a surge to 150.00 or higher if US 10-year Treasury yields continue to rise and take out the 2018 high of 3.25%. The situation becomes increasingly dangerous if the pressure ratchets higher to the upside, as an eventual capitulation from the BoJ would come at an even loftier level and trigger that much large of an avalanche of mean reversion. Helmets on!