Head of FX Strategy
Summary: e should expect to know the identity of the successor to Bank of Japan Governor Kuroda within a week, with odds leaning for the more dovish option Amamiya. This morning, the Riksbank had a job to do and that was to stop the slide in the woefully weak krona. With an acceleration of QT and hawkish guidance, it appears Governor Thedeen was up to the task. USD in limbo.
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Today's Market Quick Take from the Saxo Strategy Team
FX Trading focus: Awaiting identity of new BoJ Governor. How much JPY upside potential? Riksbank gets the job done in supporting SEK.
Central bank watchers are obsessing on the identity of the new Bank of Japan Governor, set to replace Kuroda in early April, with an announcement likely coming within a week. The dovish current Deputy Governor Masayoshi Amamiya is the front-runner, with former deputy governor Hiroshi Nakaso, a more neutral candidate also theoretically in the running, with the low odds hawkish candidate Hirohide Yamaguchi also a name in circulation, although there is said to be significant opposition to his candidacy among ruling LDP lawmakers. Hard to tell how much pent-up reaction is in the mix here, and still rather important to consider the backdrop as well, as the JPY has made a very significant adjustment against higher against the most important currency, the US dollar, although much of the heavy lifting there has been done by the greenback’s weakening. Still, the JPY is almost 8% off its broad, CPI adjusted lows, so the new leadership is already priced to deliver a solid policy adjustment. The various central banks are moving at different speeds, but I suspect significant JPY upside potential from these levels can only be realized in a more negative economic environment, with cratering bond yields and widespread weak risk sentiment and tightening financial conditions – in other words, by “bringing down the rest of the world” and making the BoJ’s policy less relatively dovish. In the direction of tightening, the Bank of Japan under most of the plausible leaders will most likely take an incrementalist approach to avoid significant volatility.
Chart: USDJPY
Momentum has left the building in the USDJPY chart, as the recent move below 130.00 was more than a bridge too far, now that Fed rate expectations have been ratcheted strongly back higher from their recent lows. The USDJPY rally off the sub-129.00 lows would have been more significant, had longer US treasury yields moved on the same scale. The dovish option to replace Governor Kuroda at the helm of the BoJ seems to be the front-runner, and could help drive a further consolidation higher in USDJPY toward the 200-day moving average, though that would likely require a more determined lifting of the entire US treasury yield curve. Consider that USDJPY is trading at the same levels prevailing last May, when the US 2-year yield was well south of 2% and the 10-year yield was near 3%. So clearly, a solid BoJ policy shift is at least partially priced.
Today’s Riksbank meeting was a watershed development for the krona as new Governor Thedeen and company hit the right notes to shore up the currency’s prospects after its woefully weak performance of late. It was about time, after core inflation in Sweden posted a new cycle high above 10% in December. The bank hiked the 50 basis points as expected and guided for “probably” more tightening to come, but importantly also announced an acceleration of bond sales to reduce the balance sheet (QT) in April, which helped boost 10-year Swedish Government bond yields a chunky 20 basis points today, bringing them suddenly close to par against German yields. As well, Governor Thedeen specifically mentioned concern on the currency as a driver for inflation. EURSEK slammed down through 11.30 and is even below 11.15 as of this writing. This is a significant move by the central bank and could see EURSEK retreat as far as its 200-day moving average in coming weeks – currently rising at the 10.81 area.
Otherwise, we saw Fed speakers yesterday, generally leaning on “higher for longer” message but entirely failing to shift expectations, as yields actually dipped modestly. Today’s weekly claims number and tomorrow’s flash Feb. University of Michigan sentiment survey are weak beer for incoming data, though the claims trend lower has been remarkable – can in continue?
Table: FX Board of G10 and CNH trend evolution and strength.
The big move in SEK will show up even more forcefully in the days ahead even if SEK merely holds the current level as the moving average swing. Now the Norwegian krone is the lonely Scandie at the bottom, oddly weak given oil prices, but not given Norges Bank’s dovishness. Elsewhere, the ECB’s dovish surprise has helped CHF back higher and the USD trend is still in limbo after the recent bullish reversal that has yet to see the greenback following through higher.
Table: FX Board Trend Scoreboard for individual pairs.
EURGBP is having a go at reversing the upside break – not there yet, but bears watching. Elsewhere, watching JPY pairs over the next week on the BoJ Governor news as noted above, and the USD pairs for status. EURSEK will reverse to a downtrend tomorrow if not today if it holds below 11.20.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
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Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.
