FX Update: Two-way risks over Bank of Japan meeting. FX Update: Two-way risks over Bank of Japan meeting. FX Update: Two-way risks over Bank of Japan meeting.

FX Update: Two-way risks over Bank of Japan meeting.

Forex
John Hardy

Head of FX Strategy

Summary:  The FOMC brought even less than was expected, which was very little indeed. The USD weakened in reaction, but here we have a dovish ECB statement and strong US data lifting the greenback once again. USDJPY downside protection in options is the most heavily bid since March as traders ponder a Bank of Japan policy move tomorrow, but volatility risk remains two way for USDJPY as the BoJ decision is likely a binary one to either tweak or do nothing.


Today's Saxo Market Call podcast

FX Trading focus:

  • FOMC was a damp squib and the ECB meeting should have been a non-event as well, but is read as more dovish than expected at first blush.
  • Strong US data an interesting challenge to the FOMC reaction
  • Huge hedging in JPY upside risks ahead of BoJ meeting – ironically can make volatility risks run both ways.

The ECB hiked rates as expected and kept a data-dependent message on the odds for a September meeting additional hike. This was no major surprise as several ECB officials have been out and pulling away from pre-committing to any further tightening. The news this week that Q2 bank lending was cratering at a record rate is sending chills up and down the bank’s spine, and we have to remember that the Eurozone is a a more banking-intensive economy. Also, unlike the US, there was less of a cash splash to boost personal income and savings during the pandemic and less of a refinancing boom that keeps so many in the US still operating at record low interest rates from pandemic era loans. Unlike the previous statement, this new statement from the ECB highlights that its policy moves are feeding through: “financing conditions have tightened again and are increasingly dampening demand, which is an important factor in bringing inflation back to target.” This may prove the last rate hike for the cycle, but at minimum should mean the euro’s days as a broadly strong performer are over. It is a bit surprising that the market found the decision as surprising as it did (although some of that was the USD move weaker in the wake of the FOMC meeting that was simply backed out), but now we watch whether the damage to the euro widens out to both EURUSD and EURJPY (the latter on the Bank of Japan risks as noted below). For EURUSD, a close below 1.1000 for the week suggests the highs are in for now.

Just after the ECB meeting, we see strong US data (lowest weekly jobless claims number since February and strong GDP print, although that was on a very low GDP price rnumber of 2.2% annualized vs. 3.0% expected and 4.1% in Q1) complicating the market’s reaction to the FOMC meeting. The FOMC meeting itself was a non-event with an unchanged statement on balance and Fed Chair Powell determined not to say anything except that the Fed remains data dependent. The equity market can hear no evil, however, as stocks continue to soar – that looks a bit out of place in treasury yields heat up again on the incoming data.

Chart: EURUSD

The Bank of Japan could yet have influence on the direction in the US dollar if there is a strong reaction off the back of the Bank of Japan meeting tonight, but taking EURUSD by itself, the key here is the 1.1000 area that bears need to retake into early next week to suggest that a top is in for now.

Source: Bloomberg

Bank of Japan can only surprise?

As few have a clue what the Bank of Japan is set to deliver at its meeting tomorrow, it should have the most potential to surprise and trigger a sharp directional move, especially if the Bank of Japan moves forward with a policy tweak and provides guidance for more to come. But even the expression of a likely incoming tweak once a new round of projections is available for the October meeting could do much of the same as the market will see it as pre-committing to a course of action. I see this as unlikely – either the Bank of Japan tweaks or keeps its mouth shut on its intentions and suggests all is unchanged for now as it considers its options and conducts its policy review.

In the meantime, option market implied volatility has blown out considerably in recent days and suggests the greatest anticipation (or at least greatest hedging activity) since the March meeting (Kuroda’s last) that something may be afoot at this meeting. The 1-week USDJPY implied volatility has risen to nearly 18% and one-day risk reversals are extremely bid for downside protection in USDJPY – nearly a 10% premium for puts, perceived for good reason as the side offering the most volatility potential. Arguably, JPY weakness is still a risk if the Bank of Japan delivers nothing at all, especially as all of this option buying will see the unwinding of hedges if nothing happens tonight.

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

Two way risks for the JPY noted above. The USD bear market is seeing another challenge here as the USD backs up – we should know more depending on whether EURUSD capitulates through the next important area into 1.1000 and whether USDJPY punches back higher (presumably because the BoJ chooses the “do nothing” path once again.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.

Several USD pairs in play through the end of this week and into next. GBPUSD looks heavy for new down-trend risks if the 1.2800 area fails, AUDUSD trend status is in limbo, etc.

Source: Bloomberg and Saxo Group

Latest Market Insights


Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

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)

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992