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Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: BoJ fails to budge, JPY knee-jerks lower, but… USD lower on plentiful liquidity.
The Bank of Japan not only failed to produce new policy tweaks in the direction of tightening, but even “enhanced” its facility to support banks with up to 10 years of lending against collateral, with a 5-year auction set already for next week. Governor Kuroda piled on with a defiant stance in the press conference, forecasting a decline in CPI to back below 2% by the end of this year and saying it is far too early to declare that inflation has returned. As the market was leaning and hedging for the risk of a widening of the band and more hawkish guidance, as evident in overnight and very short-dated options premiums rising to their highest in years, the non-move delivered an enormous snap-back release of the tension.
It was rather notable that this knee-jerk JPY sell-off was pared significantly in the subsequent hours and worth considering that the specific surprise of the meeting overnight may not deliver a strong new JPY weakening trend. First, the backdrop of falling global yields is a JPY-positive already, and a new aggravated JPY weakening move would likely require fresh fears of the inflationary regime returning in force, taking long yields higher everywhere, with the Bank of Japan seen badly lagging that trend. The other possibly JPY-supportive factor is that Governor will sail off into the sunset at the beginning of April, with the profile of his replacement set to be identified in the coming weeks. If we continue to see weak US data and a drop to new cycle lows in the US 10-year yields, the JPY could revert quickly to strength across the board, with more notable strength in the crosses if we ever get around to fretting bad data (more on that below).
USDJPY knee-jerked higher on Kuroda’s failure to deliver, but saw much of that move erased by lunch-time in Europe. As note above, the backdrop remains rather JPY supportive despite Kuroda’s stubborn stance, but a broadly weaker US dollar today is another factor, one that may be driven by strong USD liquidity as the US treasury continues to draw down its general account with the Fed, something that is more than offsetting the Fed’s current pace of QT of late. As well, the latest weekly data point on bank reserves held at the Fed jumped some $250 billion while the repo facility dropped by a similar amount.