Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
Chief Macro Strategist
Summary: The market knows that the Bank of Japan is in the process of exiting the ten years of hyper-accommodation under Kuroda, and wants to front-run where Bank of Japan policy is expected to be a quarter or two from now, making it difficult for the Bank of Japan to navigate the transition as it despises extreme volatility. This has ironically meant enormous de facto BoJ QE in a rearguard action against . But even if the BoJ announces nothing new at its meeting overnight, significant volatility is very likely.
Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team
See Saxo’s Charu Chanana for an excellent run-down of the Bank of Japan meeting overnight as a starter. As Charu points out, we have a significant volatility event on our hands, with the chief uncertainty whether the BoJ capitulates now to a more significant shift in a policy, merely tweaks once again, or only guides for a further cautious adjustment in upcoming meetings. The only compelling reason for the Bank of Japan to go with the more dramatic option is to avoid continuing its rear-guard actions to enforce the top of the yield band at 0.50% for 10-year JGB’s. The BoJ’s holdings have ballooned a further few percent in the short space of a few months – ironically a massive QE liquidity boost for asset markets at a time when we are discussing impending tightening. So one angle on this is that, if the Bank of Japan sufficiently widens the band or steps away from capping longer yields entirely, this effective QE will come to a screeching halt. Not good for risky assets, but likely not bad for the US dollar as the greenback should always perform as a relative safe harbor in troubled markets. And here we’re not talking in USDJPY terms, but in other USD pairs (USDCAD, AUDUSD, GBPUSD, etc..)
So it may be important to consider that this BoJ meeting tonight is far more a JPY cross risk than a specifically USDPY risk. Other JPY crosses, like AUDJPY, may not have sufficiently adjusted to the implications of significant future tightening of yield spreads and 10-year Australian yields are also trading near recent lows, just as US longer yields are.
Chart: AUDJPY
As noted above, watching JPY crosses besides USDJPY as a measure of the JPY reaction to whatever the Bank of Japan delivers tonight. For AUDJPY, the important pivot area comes in around 87.50, with a break possibly leading to a test toward 81.00 (the 200-week moving average) or even 78.50 eventually on a huge reset of the JPY across the board. That fits with a USDJPY reset toward 115.00 (putting AUDUSD at around 0.6825) or with AUDUSD far lower if the USDJPY reset is far more modest, as massive volatility across markets might see the US dollar finding a solid bid in other USD pairs as a safe haven.
Elsewhere, we saw firmer UK earnings data for November (+6.4% YoY vs. +6.3% expected, ex Bonus, and vs. +6.1% in October) and the unemployment and claims data and revision were benign. The EURGBP rally has gone stale for some time now and may at risk of a reversal back lower. UK December CPI is up tomorrow. The market entirely failed to celebrate a neck-snapping reversal in Germany’s ZEW survey expectations for January to +16.9 from -23.6 in November, while the present situation index remained in the dumps at -586, failing to improve from the -61.4 n November as much as expected.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY dominating market attention into the Bank of Japan meeting overnight, with a secondary focus on the greenback if markets get particularly hairy. Note that the sterling weakness has almost completely faded as a theme.
Table: FX Board Trend Scoreboard for individual pairs.
All JPY crosses are in a down-trend – will the Bank of Japan put up a fight or let the JPY continue to rise by keeping the BoJ path to a semblance of normalization open? EURCHF has reversed back below parity, perhaps on the anticipation of a pick-up in volatility here – it has been a strange episode of volatility for that pair after the recent quick run above parity.
Upcoming Economic Calendar Highlights
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)