FX Update: JPY strength continues under the radar FX Update: JPY strength continues under the radar FX Update: JPY strength continues under the radar

FX Update: JPY strength continues under the radar

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  While many exchange rates remain clearly driven by buoyant risk appetite, the Japanese yen is quietly strong relative to its normal behavior with the backdrop of strong risk sentiment in global equities, and to a degree in EM in recent days. We continue to watch EURJPY for signs of a more profound breakdown.

Yesterday I penned an article looking at initial thoughts on the upcoming US Presidential Elections and reasonably strong conviction that Trump will lose, and what a Biden presidency would likely mean for asset markets.

Late yesterday, Fitch downgraded Italian debt to BBB-, just a notch above junk, but this only merited some seven basis points of spread widening in early trading today in Europe as we all know that the ECB is all about crushing the spreads until EU and Italian politicians decide that the EMU is to be explicitly reconsidered for Italy. The ECB has made the mistake of putting an amount on its intended asset purchases, something the Fed has abandoned in the case of treasuries and MBS, and the ECB would do well this Thursday to at least dramatically lift the amounts or just come out with the “however much is necessary” rhetoric around sovereign purchases. But even there, the ECB will eventually be treading dangerously deep into political territory once purchases go beyond a certain size. The next key data for the existential angle on the EMU and the euro is the May 6 video meeting of EU leaders.

The Swedish krona jumped higher in the wake of yesterday’s RIksbank meeting as Sweden’s central bank reduced its forecast horizon for policy and kept it at zero rather than shifting to negative as many might have feared, with a minority of observers even looking for a rate cut at yesterday’s meeting. The statement didn’t rule out negative rates in principle. EURSEK slammed lower after the recent bottled-up price action and stopped right on the critical support of the 200-day moving average just below 10.70, a pivotal level to watch from here.

The Hungarian forint was marginally weaker yesterday after the Hungarian central bank announced the start of QE in Hungary – a country that in the past I would have argued was far from able mobilize unconventional monetary policy like large scale asset purchases without collapsing the currency. But with unconventional policy turning conventional, the move looks less shocking. Still, with Hungarian real interest rates having gone steeply negative before the Covid19 outbreak, we will be watching inflation closely for signs that the government is overheating the money printing presses. AS well, we are concerned that the new ECB budgets (the seven year MFF) will leave Hungary out on in the cold due to differences on governance issues, i.e., Hungary having enacted one-man rule by decree.

The FOMC meeting is up later today and the chief focus there will be how the Fed positions and explains its unprecedented actions of the last many weeks and how it sees its role from here. The question and answer session in the press conference may provide the best sense of the Fed’s stance at the moment. Most important in the longer arc of this is that the Fed’s actions cut deep into domestic political implications.


Despite the skirting of any immediate existential strains after last week’s EU Council meeting and a considerable bounce in the Italian public debt (BTPs), the EURJPY cross remains heavy and below the major support line, and we still consider EU existential questions a clear and present danger for the medium term. The JPY looks remarkably bid given the backdrop and the BoJ’s “unlimited” purchases comments and suggests that capital flows are JPY supportive for now and could become profoundly so if risk sentiment ever rolls over and drives a broader and more intense JPY rally. The next major support level lower comes in around 110.00.

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