FX Update: BoJ meeting looming large as US CPI focus fades. FX Update: BoJ meeting looming large as US CPI focus fades. FX Update: BoJ meeting looming large as US CPI focus fades.

FX Update: BoJ meeting looming large as US CPI focus fades.

John Hardy

Head of FX Strategy

Summary:  The perfectly in-line December US CPI data left the market grasping at straws and eventually saw treasuries and sentiment rallying as the US dollar sold off, with the Japanese yen leading the charge on the risk for further tweaks at next Wednesday’s BoJ meeting. The market took the 10-year yield well above the 0.50% band limit overnight in anticipation of a further widening, doubling down on the upside pressure on the JPY as yields ease elsewhere.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: BoJ meeting next Wednesday looming large as US CPI focus fades

Yesterday’s December US CPI release and the subsequent market reaction suggests to me that the focus on the chief US inflation data points is likely set to ease on a month-to-month basis. The data was perfectly in-line with consensus expectations for a solid drop on the year-on-year headline and core to 6.5%/5.7%, respectively. And as we discussed on this morning’s Saxo Market Call podcast, it is no secret that the heaviest portion of the core inflation data point is the infamous Owners Equivalent Rent (OER), which has a 32% weighting and is notoriously lagging. Some private measures of rental inflation are already showing month-on-month declines and the year-on-year rises have approximately halved, while the OER data just posted a new high for the cycle in December.

This is not to say that inflation will no longer be in focus, but if it is to crop up as a significant concern again, it will more likely be on signs of aggravated rises in earnings, a reheating services sector, a new spike in energy prices, etc., all of which are in varying degrees of abeyance now. In other words, the incoming data still very important, but the focus will be far more diffuse. The upcoming earnings season, for example, will provide some interesting inputs as companies comment on Q4 trends and set their expectations for the coming quarter.

The strongest currency move yesterday was the rally in the Japanese yen, something that was set in motion ahead of the US CPI release by developments in Japan yesterday. Press reports that the Bank of Japan is set for further policy tweaks, a BoJ survey that upgraded the outlook for several regions in Japan and mentioned wage gains, and a preliminary report from the Ministry of Finance that December saw record selling of foreign bonds by Japanese life insurers were all in the mix. The benign US CPI data helped US treasury yields lower all along the curve, the Fed’s constant protestations notwithstanding, and JPY crosses headed sharply south late yesterday with the JPY posting new highs into the early European session today.

What will the Bank of Japan deliver? The market feels very uncertain but seems to be rushing to err on the side of caution, as 1-week implied volatility for USDJPY is at 21.5%, its highest since the pandemic outbreak and outright an extremely elevated level. This suggests that the Bank of Japan will have to deliver something, whether a hawkish hold or a surprisingly large adjustment to the band or something else to justify the excitement. There are no signs of directional panic in the risk reversals, but downside protection in USDJPY is naturally more expensive (3.3 handles more expensive for 1-week, 10-delta options).

Let’s recall that the December BoJ meeting surprised universally with the lift in the yield “band” – really a cap – to 0.50% from 0.25%. Bloomberg reports that only 1 analyst of the many surveyed is looking for any shift in the policy next week, but again, none expected anything in December either. I haven’t anything to add, other than it is ironic that the Bank of Japan is finally getting around to tightening with commodity prices massively lower and lower still on the strong JPY recover already in the bag, with US CPI data and long bond yields in full retreat and with expectations that a weakening economy will have the Fed cutting by later this year. Anything that opens a path for the Bank of Japan to leave negative rates and set itself on the path to, say, a 1.00% policy rate and an end to yield-curve-control needs a USDJPY reset of about 10-12% (at or below 115.00). For USDJPY to remain where it is or head back higher likely needs a USD liquidity crisis or a huge reheating of the inflation outlook that sees 2024 Fed rate cuts reversed and maybe even a higher terminal rate.

A fresh drop for USDJPY on US yields easing lower post-CPI yesterday and as the market braces itself for a possible further tweak to BoJ policy next week. Could wily Governor Kuroda deliver a nothingburger and leave further tweaks to his replacement in April or does he set up the expectation of another 25-basis point raise of the trading band and maybe a 10 bps hike to 0% at the March meeting, declaring that recent evidence of rising wages is vindication for his policy arc since 2013? For the policy rate, markets are only cautiously pricing an end to negative rates by April and a rate by end-2023 of +29 basis points. The frustrating setup here is that there is still a significant unknown of who will replace Kuroda in just a few months’ time. USDJPY levels include the 126.35 pivot low area (minor) and the bigger psychological level of 125.00 to the downside, while a reversal would need a quick back-up into 132.00 or so after next the Bank of Japan meeting, depending on where we are trading going into that event risk.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY standing almost taller than the CNH here in trending terms, though it was strong across the board yesterday. The USD is finally the weakest of the lot and could weaken further as long as US treasury yields continue to fall and this is celebrated in risk assets. AUD still enjoying the recent CNH strength and the euro may be getting some of its tailwind from hopes of Chinese stimulus as it is China’s largest trading partner.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Most All JPY crosses now have flipped negative after the big impulse yesterday – next Wednesday the big testing ground there. EURUSD has been in an uptrend for 50 days (flipped on November 4 at 0.9957 on the close that day). Easy reversal here technically for some of the USD pairs if yesterday’s move is quickly reversed – looking at you, NZDUSD and USDCAD, as first possible victims is USD not staying down here.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 – US Fed’s Kashkari (Voter 2023) to speak
  • 1500 – US Jan. Preliminary University of Michigan Sentiment
  • 1520 – US Fed’s Harker (Voter 2023) to speak


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 is not intended to and does not change or expand on this. 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/legal/disclaimer/saxo-disclaimer)
- Full disclaimer (https://www.home.saxo/en-mena/legal/disclaimer/saxo-disclaimer)

Boulevard Plaza, Tower 1, 30th floor, office 3002
Downtown, P.O. Box 33641 Dubai, UAE

Contact Saxo

Select region


Trade responsibly
All trading carries risk. Read more. 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

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.