FX Update: Two-way action in JPY, Fed still behind the market.

FX Update: Two-way action in JPY, Fed still behind the market.

Forex 5 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  The runaway downside in the Japanese yen was halted overnight by mixed comments from the Bank of Japan, which hinted at no change to its policy stance but noted currency volatility, with more pointed comments from the Ministry of finance. Elsewhere, financial conditions, at least in terms of market volatility, continue to ease and may be at a tipping point. Will this prompt a Fed response?


FX Trading focus: Some two-way action in JPY after BoJ comments. End of quarter ahead.

We finally saw a bit of two-way action in JPY crosses overnight after the brutal run lower in the Japanese yen over the last two weeks or so. Bank of Japan Governor Kuroda was out speaking with quite a mish-mash of comments. The preliminary March Tokyo CPI sees a similar pattern from the nation-wide February CPI numbers: a new high in the headline CPI, but with core mired near the lowest levels in a decade (-0.4% year-on-year versus -0.5% expected and -0.6% in Feb.). In Kuroda’s comments, there were no signs of him climbing down from the Bank of Japan’s policy stance and he even took the trouble to argue that a weaker Japanese yen is still supportive for the Japanese economy, arguing that inflation will be what prompts a change of policy and not the yen. And his view is that cost-push inflation like that seen currently won’t provide stable inflation of 2% over time and in fact harm the economy via a drop in disposable household incomes and corporate margins. Still, the Governor did say that the Bank of Japan is watching the currency closely, whatever that means, while the more credible Ministry of Finance (in terms of driving the actual currency interventions of the past, sometimes monumental ones) said overnight that disorderly FX moves are not desirable.

Albert Edwards, a strategist with Société Générale, put out a piece yesterday suggesting high risk of a further aggravated weakening of the yen if a carry trade develops as Japanese traders pile into foreign currencies and bonds while the Bank of Japan caps yields. This dynamic is certainly the risk as long as the Bank of Japan keeps its cap on 10-year JGB’s at 0.25% (these hit 0.24% overnight) and yields continue to rise elsewhere. Edwards also importantly points out that the widening gap between the real-effective value of the yen, currently at a modern low, with the very strong Chinese renminbi, suggesting a mounting pres. Last time, China had the luxury to “devalue” as it wanted to avoid tracking the US dollar’s further aggravated rise and because that very rise had crushed global commodity prices, particularly oil. That does not look at all like the current backdrop – but the situation looks very tense, nonetheless.

Chart: USDJPY
The USDJPY rally extension yesterday outran the latest move in US 10-year yields yesterday, which peaked very late in the day on Tuesday in the US before trading sideways, although we have seen a general extension higher in global risk sentiment coming into today, and easing financial conditions, both of which are wind at carry traders’ backs. The BoJ and Japanese Ministry of Finance comments overnight finally saw a dose of two-way volatility. And as we discussed on today’s Saxo Market Call podcast this morning, we are barreling into quarter-end (and Japanese financial year end) next Thursday after a particularly brutal quarter for bonds, which could bring some mechanical portfolio rebalancing that brings a bit of support for bonds and therefore possibly for the yen in the near term. But if the direction of bond yields remains higher whether now or beyond a quarter-end dip, the cycle top in JPY crosses may lie far ahead and possibly dramatically so if a significant cohort of traders pile into a new carry trade investment theme (as noted above), even if it is unsustainable in the long run. The next milestone is the almost 20-year high just shy of 126.00.

Source: Saxo Group

On the SMC podcast, we also highlighted the still-easy financial conditions in the US, as equities are gunning at the last major resistance ahead of the record highs after nearly the lowest weekly initial jobless claims print yesterday in US history suggesting a very tight US jobs market. One high yield credit spread indicator I track has tightened 60 basis points versus US treasury yields over the last ten days. Yesterday’s preliminary US PMI’s were solidly strong, suggesting no abrupt slowdown for now. Next week is key for additional economic data from the US, including the jobs and earnings data for March on Friday.

It feels like a long wait until the May 4 FOMC meeting if credit spreads continue to ease and equities gun higher. Will the Fed have to come out and one-up themselves once again – possibly with an indication of a super-size hike in May or even a hike between meetings? It’s not Jay Powell’s style, but this Fed continues to chase the market and inflation from behind. A Citi analyst has raised its own predictions suggesting the Fed will hike 50 basis points at each of the next four meetings. Hang on to your hats, folks.

The Russian ruble is down around 15% versus the euro since Russia invaded Ukraine, an incredible fact given the scale of sanctions against Russia, especially its central bank. But a recent Bloomberg article goes through the degree to which Russian can skirt sanctions, especially on the export side. The much more difficult task is the import side, as so many imports Russia needs are from sanctioning countries, but ironically this could help drive a widening current account surplus that helps support the ruble. Another article from Bloomberg discusses European concerns that China could aid Russia with high-tech components. The potential for knock-on and widening geopolitical conflicts stemming from the war in Ukraine and perceived “side-taking” remains a powerful risk. A phone summit with the EU commission’s Von der Leyen and Charles Michel and China’s Xi Jinping is set for next Friday.

Table: FX Board of G10 and CNH trend evolution and strength.
Not much new here, but the CHF is not following the JPY plot in any way, shape or form. Commodity strength clearly in evidence.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note hefty ATR readings (top decile volatility for last 1000 trading days) all over the shop, with one major exception…..USDCNH. The tension builds….

Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)
  • 1400 – US Fed’s Williams (voter) to speak
  • 1400 – US March Final University of Michigan Sentiment
  • 1530 – US Fed’s Barkin (non-voter) to speak
  • 1645 – Canada Bank of Canada’s Kozicki to speak

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

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

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