FX Update: Waiting for broader JPY resilience, not Godot. FX Update: Waiting for broader JPY resilience, not Godot. FX Update: Waiting for broader JPY resilience, not Godot.

FX Update: Waiting for broader JPY resilience, not Godot.

Forex 4 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Recent developments, especially the consolidation in global sovereign bond markets, have opened a solid window of opportunity for the Japanese yen to recoup some of the steep losses of the last couple of months. The CPI data today from the US may not set the tone for much longer as we all know that a bit of mean reversion lies ahead for inflation rates, but with extreme uncertainty on where inflation will be six to eighteen months from now, even if central banks wax confident.


FX Trading focus: Solid conditions for JPY to take back some lost ground. Fed’s Williams provides optimistic inflation forecast…why?

The JPY has posted a solid comeback, but the backdrop of lower energy prices and especially lower bond yields (more below) since the start of the week suggests that the JPY should be firmer still. Are traders waiting to get today’s US CPI data release out of the way or is something else preventing the JPY from a bit more mean reversion at minimum? Note the comments on GBPJPY technical in the case of GBPJPY below.

The fairly powerful consolidation in global bond markets this week has seen the US 10-year Treasury benchmark yield pushed back down south of 3.00% after trading near the 2018 high of 3.25% at the start of this week. Hawkish rhetoric from Fed members yesterday, including FOMC voter Mester, who advocates keeping 0.75% hikes on the table if necessary, failed to see yields at the front end of the curve higher. We seem to have the market looking forward to today’s US Apr. CPI data suggesting a roll over in inflation as year-ago levels of 0.7%+ for a few months are possibly set to allow the CPI data series to drop up to a couple of hundred basis points over the next few months and feed into lower core inflation as well. But then we have the NY Fed’s Williams out yesterday expressing the belief that core inflation will ease to 4% this year and 2.5% in 2023! It feels like the Fed is far from having learned its lesson on the minefield of providing economic forecasts. The pattern suggests, however, that some at the Fed may be attempting to tap the brakes on market expectations after Powell ruled out 75 basis points at last week’s FOMC meeting and now this approach from Williams.

Chart: GBPJPY
GBPJPY is the major JPY pair closes to testing important support on this run higher in the JPY on lower bond yields and weak risk sentiment more broadly, while in relative terms, the pound is suffering on the Bank of England’s dour outlook on the economy, which has the market expecting that the Bank of England’s tightening regime will slow notably versus its peers. The big 160.00 level is in play here, which looks a bit of a head-and-shoulders formation locally. This lies ahead of the well-defined former range highs near 158.00, a move below which would begin to suggest the end of the bull run from the pandemic outbreak lows of early 2020.

Source: Saxo Group

Among G-10 currencies, the Norwegian krone has suffered the most over the last couple of weeks, according to our FX Board measure of trend strength (see below). Yesterday’s Norwegian April CPI release was far higher than expected at 5.4%, which is a 13-year high and makes the Norges Bank recent decision to continue with mere 25 basis point rate hikes every quarter an excessively slow pace. EURNOK traded briefly to a new high for the year above 10.23, having entirely reversed its run lower below 9.50 (!) as the commodity theme in FX has stumbled badly since an early-mid April peak.

Inflation is high in the CEE countries, with Romania today reporting a CPI rise in March of 13.8% year-on-year and a month-on-month rise of a 3.7%, both far higher than expected.  Given that the most recent wage data from February in Romania shows wages rising at a greater than 10% pace, this is not as alarming, if still the highest inflation print I have seen anywhere in CEE or developed Europe. Which takes us to Hungary: I have spotlighted Hungary’s stunning +32% wage rise in March just ahead of the April election and inflation there is supposedly at 9.5%, actually south of what the Netherlands reported in both March and April (9.7% and 9.6%), much less what Romania is suffering in the way of inflation. To be fair, Hungary’s wage rises were at more like 10% for much of the last two years and some of the March figures were from one-off bonuses to public sector employees clearly meant to tilt the election in Orban’s favour, but the situation bears watching there even as forint (HUF) has taken all of this in reasonable stride, helped by the central bank’s 5.4% policy rate and 6.45% deposit rate.

Note that Australian Westpac consumer confidence cratered in April to 90.4 from 95.8 in April, taking it near or below 90 for the first time since the pandemic outbreak months and before that in the global financial crisis years of 2008-09 with a single blip in 2011 below 90.

Table: FX Board of G10 and CNH trend evolution and strength.
The Euro getting some respect in the crosses even if attempts to bounce versus the strong US dollar have not impressed. The JPY momentum has turned net positive, but still not much of a signal there. Note NOK’s weakest-of-G10 status of the last couple of weeks.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURCHF has shied away from 1.0500 after a test yesterday – lower bond yields likely coming to the CHF’s aid there. The key trends to watch are the JPY crosses if bond yields press lower still, and then the status of AUDUSD and USDCAD after the breaks of important USD resistance in these pairs in recent days.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Apr. CPI
  • 1230 – US Apr. Real Average Hourly Earnings
  • 1600 – US Fed’s Bostic (non-voter) to speak
  • 1800 – US 10-year T-Note auction
  • 2301 – UK Apr. RICS House Price Balance

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo 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 Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, 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 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 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 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 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 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.

Trading in financial instruments carries risk, and may not be suitable for you. Past performance is not indicative of future performance. Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.