FX Update: While we await BoJ news, Riksbank takes care of business.

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Today's Market Quick Take from the Saxo Strategy Team

FX Trading focus: Awaiting identity of new BoJ Governor. How much JPY upside potential? Riksbank gets the job done in supporting SEK.

Central bank watchers are obsessing on the identity of the new Bank of Japan Governor, set to replace Kuroda in early April, with an announcement likely coming within a week. The dovish current Deputy Governor Masayoshi Amamiya is the front-runner, with former deputy governor Hiroshi Nakaso, a more neutral candidate also theoretically in the running, with the low odds hawkish candidate Hirohide Yamaguchi also a name in circulation, although there is said to be significant opposition to his candidacy among ruling LDP lawmakers. Hard to tell how much pent-up reaction is in the mix here, and still rather important to consider the backdrop as well, as the JPY has made a very significant adjustment against higher against the most important currency, the US dollar, although much of the heavy lifting there has been done by the greenback’s weakening. Still, the JPY is almost 8% off its broad, CPI adjusted lows, so the new leadership is already priced to deliver a solid policy adjustment. The various central banks are moving at different speeds, but I suspect significant JPY upside potential from these levels can only be realized in a more negative economic environment, with cratering bond yields and widespread weak risk sentiment and tightening financial conditions – in other words, by “bringing down the rest of the world” and making the BoJ’s policy less relatively dovish. In the direction of tightening, the Bank of Japan under most of the plausible leaders will most likely take an incrementalist approach to avoid significant volatility.

Chart: USDJPY
Momentum has left the building in the USDJPY chart, as the recent move below 130.00 was more than a bridge too far, now that Fed rate expectations have been ratcheted strongly back higher from their recent lows. The USDJPY rally off the sub-129.00 lows would have been more significant, had longer US treasury yields moved on the same scale. The dovish option to replace Governor Kuroda at the helm of the BoJ seems to be the front-runner, and could help drive a further consolidation higher in USDJPY toward the 200-day moving average, though that would likely require a more determined lifting of the entire US treasury yield curve. Consider that USDJPY is trading at the same levels prevailing last May, when the US 2-year yield was well south of 2% and the 10-year yield was near 3%. So clearly, a solid BoJ policy shift is at least partially priced.