Head of FX Strategy
The Bank of Japan meeting announcement is due on Friday, June 14. The central bank is likely to keep its short-term target rate unchanged at 0-0.1%, but it has been reported that the BOJ will consider scaling back its purchases of Japanese government bonds (JGB).
The BOJ currently buys 6 trillion yen of JGBs per month. Any cutback in this amount will mean tapering of quantitative easing (QE). More importantly, if the BOJ shrinks its balance sheet by reducing its new JGB purchases to less than the pace at which its current holdings are expiring, then this would mean Quantitative Tightening (QT). This will likely be a strong message on both inflation and FX from the BOJ.
Market expectations are also focused on signals for a possible rate hike in July, influenced by the outcomes of recent shunto wage negotiations.
Comments from Ueda will likely signal conviction towards reaching the 2% inflation target, and hints that the BOJ is attentive to a weaker yen and will take further steps on policy normalization. However, BOJ’s pace of normalization is likely to remain gradual, and therefore Ueda’s remarks will also be cautious and hedged. Ueda is likely to emphasize that monetary conditions will remain accommodative despite any policy adjustments.
While the prospect of QT and hints of a July rate hike could exert upward pressure on JGB yields, their impact in supporting the yen against the US dollar may be limited.
The USD has found additional tailwinds recently to stay supported for now, which include:
USDJPY may have seen a top for this cycle at 160, given the rate differential between US and Japan is likely to narrow, and not widen, from here. However, even if the Fed cut rates twice this year, that will bring the Fed Funds rate down only to 4.75-5%. Meanwhile, the market has priced in 20bps of rate hikes for the BOJ for this year, and that will still mean an over 4% rate differential between the Fed and the BOJ which is significant and would limit the recovery of the yen and the greenback.
Direct FX comments from the BOJ’s desk at this meeting also remain unlikely given the criteria for depreciation of the yen that usually worries them has not been met – a 10 yen/USD move within one month, or a 4% depreciation in the yen over two weeks.
The yen could, however, see a more pronounced recovery on the crosses if the BOJ’s tapering size and the guidance on upcoming rate hikes manages to send a hawkish signal to markets. EURJPY and CADJPY could move back lower towards the 50-day moving average around 167.50 and 113.50 respectively.
Recent FX articles and podcasts:
30 May: JPY: Intervention fears clash with carry trade attractiveness
29 May: AUD: Hot inflation reaffirms rate cuts remain some way off
Recent Macro articles and podcasts:
Weekly FX Chartbooks:
3 Jun: Weekly FX Chartbook: ECB and Bank of Canada likely to cut rates
27 May: Weekly FX Chartbook: Fresh USD upside from hawkish bolts and trade threats
FX 101 Series:
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
