FX Update: JPY tries to work up a head of steam post-BoJ
Head of FX Strategy
Summary: A further rise in US yields yesterday, even at the shorter end of the US yield curve, spooked risk sentiment once again, and a mini-crash in crude oil prices has pressured commodity currencies and spoiled the NOK bulls parade in the wake of the Norges Bank meeting. The most interesting development overnight, however, was the potent rally in the Japanese yen before and after the Bank of Japan announced its policy review.
FX Trading focus: Calming yields overnight boost JPY rally on BoJ
While it was the further yield spike yesterday that reversed the initial reaction to the FOMC meeting that unsettled markets, the combination of easing yield pressures overnight and the Bank of Japan policy review is helping to ignite a revival of the Japanese yen – or at least a respectable consolidation after its long run lower. The three-month policy review has resulted in the bank announcing an expanded range for the 10-year JGB yield, which will be allowed to trade 25 basis points above or below zero. This was more than expected, but is hardly heady stuff if US and other long yields are set to rip higher still in coming months. Somewhat more “hawkish”, the bank announced it will no longer purchase Nikkei 225 ETFs, only buying broader Topix ETFs and it removed the lower bound of purchases, suggesting that it doesn’t have to buy any stocks if it doesn’t want to.
This policy review was launched in the midst of a very different set of circumstances than we see at present and amounts more or less to a “checking of the box” of having carried a review out and a very modest recognition of the changed environment internationally (prospects for opening up and rising yields), but is not hawkish by a long stretch. There may be a trading opportunity or two for a consolidation higher for the JPY after is very long run lower, especially if rates back off for a while and commodities go through a consolidation wave or two. The EURJPY chart is a technical and low-ish beta base case for a bit of consolidation after yesterday’s engulfing candlestick and momentum turning. But beyond the near term of a few one to three weeks, the only chunky up-side scenario for the yen would be a deflationary bust – not where the market is by any stretch of the imagination at the moment. JPY bears close watching as well on the transition to a new financial year after the end of this month.
Odds and ends
TRY holds well after CBT “credibility hike” - this is a positive sign for TRY that the currency held its rally well yesterday in the wake of the CBT hiking 200 bps vs. 100 bps expected, and the plunge in oil prices is a kicker of a tailwind for the TRY. Another run below 7.00 for USDTRY possible here as long as US yields slow or reverse their rise as well, as long as EM credit remains complacent.
BoE doesn’t stand in the way - the Bank of England meeting came and went yesterday without notable fuss, and the lack of concern on the steep backup in longer term yields of late suggests that the bank retains the same comfort that fiscal stimulus is sufficiently strong in the UK to overwhelm any concern about longer rates rising. EURGBP champing at the bit for more declines – are we set for a run all the way to 0.8300? The market is getting more aggressive in pricing in BoE hikes than Fed hikes for the late 2022 time frame. Local resistance at 1.4000 in GBPUSD quite clear-cut for whether that pair can press higher.
Russia surprises with a hike of 25 bps to 4.50%. This is an aggressive move by the Russian central bank likely linked to the recent sharp sell-off in the ruble on comments from Biden on Russia and Putin, specifically. The hike is getting some respect from the market – though USDRUB trades in the middle of last month’s range. The inflation rate has moved above the inflation rate in recent months, and the central bank had already signaled incoming hikes, and international investors will treat RUB with extreme caution until the shape of possible US sanctions is known. The key technical line in the sand to the upside is the 75.00 level in USDRUB.
NOK and CAD stopped in their tracks by crude oil meltdown. An overdue oil correction came all at once yesterday and spoiled the NOK bulls party on the very day that the Norges Bank brought forward rate hike expectations, keeping EURNOK well away from the interesting 10.00 area. NOKSEK impressively managed to re-take parity today and offers the sense that as long as the energy market doesn’t fall apart, there may yet be hope that the recent break above 0.9950-1.000 will stick. For CAD, the crude sell-off finally saw USDCAD finding support below 1.2400, and the rebound found resistance just north of 1.2500 (more below)
USDCAD bounce sharply after punching through to new lows no seen since early 2018 on the sharp reversal in crude oil prices. The pair found resistance near the 1.2500 round level and prior low. The USDCAD trend has been persistent for months, although since December each new has been quickly gathered up for a period of consolidation. To provide any sense that the pair is putting in a more significant low, we would need to see a punch rally back to 1.2700-50. Until then, 1.2600 is the next resistance area after 1.2500.
Graphic: FX Board of G10 + CNH trends and momentum
The trend evolution readings lately are mostly an exercising in watching recent strong trends slow or slightly reverse, as we await signs for whether the USD is going to launch into a full bore rally after its sharp snapback earlier this month, as well as watching how profoundly the commodity currencies will continue to stumble (CAD never suffered as much as other commodity FX recently) and how much further consolidation, if any, the old safe havens JPY and CHF will see to the upside here.