FX FX FX

FX Update: Bank of Japan out-doves them all. USD tactically pivotal.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US dollar weakening in the wake of the FOMC meeting is fading fast just as risk sentiment has taken a turn for the worse. Was the entire reaction to the FOMC a misleading development related to a collapse in volatility rather than any real new development? Regardless, the close today is pivotal for understanding where the US dollar is in this cycle. The same goes for the Japanese yen after a resounding dovish performance from Kuroda and company in the BoJ meeting overnight.


FX Trading Focus: USD pivoting back higher, pesky risk sentiment correlation remains with partial exceptions.

The US dollar is back higher today, with a key pair like EURUSD pivoting hard back lower just after it had taken a look at pivot levels higher above 1.1100 yesterday/overnight. We’re now a good figure off those highs, so barring a significant additional reversal higher in today’s trade, the tactical picture looks neutral to bearish here for that pair. Other USD pairs are less impacted by the change of sentiment – for example the Aussie still trying to hang in after an impressive run back higher in recent days, supported by the latest resurgence in energy- and a few other relevant commodities prices. The status for that pair is also critical in the next couple of sessions after it now has nominally broken back above the 0.7350 area, (similar setup as with USDCAD as noted in chart analysis below).

ECB President Lagarde and Chief Economist Lane were out indicating that a Q4 rate hike is likely, which saw the market adjusted the late 2022 rate expectations a few basis points lower and took some of the sting out of the reaction to the dovish Bank of England meeting yesterday.

Breaking: The Fed's Christopher Waller (FOMC voter on the Board of Governors) was out with very hawkish rhetoric in a TV interview today, saying that the data is "screaming" for 50 basis point hikes, but that he agree to go for only 25 due to concerns. But coming meetings (!) should see 50-basis point moves "or more". Whoa. 

No coincidence to see that the USD is firming as risk sentiment has also stumbled overnight, whether due to the resurgence in oil prices after what may have proved over-hyped signs that a peace deal might be in the works in Ukraine, or because some of the squeeze higher in sentiment may simply linked to the massive “release” or marking down of implied volatility once the market got to the other side of the FOMC meeting (the equity market, as we discussed in this morning’s Saxo Market Call podcast, has a massive day of derivatives expiring today). And with the war in Ukraine not easing up and US officials suggesting that Russia’s Putin may threaten to escalate to the use of nuclear weapons if the situation in Ukraine drags on. Also watch another major geopolitical event risk up ahead today as US President Biden is set to call Chinese leader Xi Jinping to discuss Ukraine and threatening consequences if China moves to aid Russia in avoiding sanctions or especially in providing military support.

Bank of Japan doubles down on current policy in meeting overnight, with Governor Kuroda saying there is “absolutely no reason” for the BoJ to hike rates. The BoJ maintains a yield-curve-control policy on JGB’s, with a cap on the 10-year yields at 0.25%. Overnight, Japan’s headline CPI rose to a cycle high of 0.9% year-on-year as expected, but the underlying, “ex fresh food and energy” CPI was a new cycle low of minus 1.0%! Kuroda said that the BoJ doesn’t know where April CPI will be, but that it could hit 2% at the headline, but that this would in no way change the BoJ policy direction Specifically on the currency, Kuroda said that it is wrong to think of a weak yen as a negative for the economy now. As long as core inflation levels look anything like those reported for February, he has a point. USDJPY was higher today – back above 109.00 – but US long treasuries are also bid and some JPY crosses are well-off intraday highs. Would only expect additional JPY downside from here if global long yields push to new cycle highs. Again: end of Japan’s financial year approaches at the end of this month – it is often an important inflection point for USDJPY.

Chart: USDCAD
USDCAD looking very much like an upside-down version of AUDUSD, as we watch whether this is a double bottom set-up or if the pair is set for a further breakdown. Given the seeming correlation with risk sentiment, a push lower through the range lows nearby just below 1.2600 and the important 200-day moving average might require a durable improvement in the sentiment outlook. The chart is distinctly uninspiring on a longer-term basis after having traced out the current range between August and October of last year between about 1.23 and 1.30 – with the range narrowing on the downside since then.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
JPY weakness remains impressive, while the AUD is trying to resume its upward drive and the euro comeback attempt seems to be stumbling tactically.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching the status of USD/commodity FX pairs that have flipped against the USD’s favour in recent days for whether this is the start or something or whether a new bout of risk aversion keeps the USD bears at bay for another round. Also, whether the BoE has only triggered a one-off sell-off is another focus – EURGBP the key pair there. AUDNZD flipping back higher is notable after the episode below 1.0700 was rejected yesterday.

Source: Bloomberg and Saxo Group
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