Chief Macro Strategist
Summary: The Bank of Japan policy meeting was about as dovish as one could have expected, and the JPY knee-jerked sharply lower. But a major further rout for the yen would likely require a significant shift higher in global yields. Elsewhere, the USD firmed broadly ahead of March US PCE inflation data and the run into next Wednesday’s FOMC meeting.
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FX Trading focus: BoJ surprises very dovish, tanks JPY, but...
The Bank of Japan surprised on the dovish side in announcing that it would indulge in a 12-18 month policy review, seemingly not convinced that inflation will sustain at 2% in the longer run as it expects inflation to fall back later this year and press conference comments seem to make it clear that they would like at next spring’s wage negotiation rounds before they are convinced. A thorough run-down of the BoJ meeting and policy considerations from here is out this morning from my colleague Charu Chanana. All of the comments and messages from this meeting are a real mixed bag. Discussing it with Charu, she convinced me that we shouldn’t over-stress the time-line of the policy review and that it is important to consider as well the comments noting the negative “side effects” (like losing control of the BoJ balance sheet…) of the current YCC policy when it is under strain. The JPY move lower today looks very aggressive, and may run out of steam very quickly if yields stay frozen in their recent ranges – more below in USDJPY chart discussion.
Chart: USDJPY
USDJPY ripped higher on the very dovish Bank of Japan guidance and its heel-dragging on signaling any normalization of policy, even if it left itself some room for tweaking policy. The move today was very aggressive and the next focus is on the 200-day moving average, currently near 137.00 which was clearly the resistance on the last pull higher back in early March before the US banking turmoil shocked rates back lower. If US yields break out of their range to the upside and the market grows increasingly uncomfortable with its expectations for Fed rate cuts later this year, we could see a significant follow through higher still, but by the same token, as noted above, it may not build much more steam if yields stay rangebound, allowing the Bank of Japan to maintain its very cautious strategy.
US debt ceiling – still important, but timeline extended. Very shortly after my Wednesday update, the Republican House leadership announced that the votes were there for an altered version of the spending bill that would lift the debt ceiling. This spooked markets and saw US treasuries rallying, as it shows strong Republican solidarity in the House, aggravating the risks that the debt ceiling issue goes down to the wire. (Again, the Democrat-controlled Senate and Biden will never pass the bill that the House Republican majority just passed) But later on the same day it also emerged that stronger than expected tax revenues over the last week as tax payments from this month roll in mean that crunch time has move back to July rather than the early June time frame. In short, while nothing is resolved and the issue could yet produce market instability, the immediacy of the problems has faded and we’ll have to see how the Biden administration proceeds from here after declaring no willingness to even debate the issue as the White House wants a lifting of the ceiling with no conditions. The latest Politico article on the subject suggests that the Democratic tactic will be to attack House members that supported the bill on holding the country hostage and for some of the bill’s controversial contents that would defund popular programs.
NOK gets another drubbing on Norges Bank FX purchase announcement for May. The Norwegian central bank seems to be calibrating its daily NOK sales poorly as its announcement of dropping the rate of sales (meant to offset incoming FX from oil and gas revenues) to NOK 1.4B per day from 1.5B. Something needs to change structurally in Norway if it wants a more rational FX policy in a time of inflation – yes, it can recalibrate NOK sales to get them at the right level relative to incoming oil and gas revenues (these ramped as high as NOK 4 billion per day during the high gas prices last year, but the reductions in purchase have apparently not caught up with the reality on the ground, judging from the market reaction. A more structural solution would be a deeper domestic bond market created by a Norwegian government that funds deficits with new debt. The Norges Bank should also run a slightly tighter ship (if this latest sprint higher holds, could they consider a larger hike next week?). EURNOK is working into nosebleed territory – could certainly go higher still, but if the right policy decision is hinted at, much less made, NOK could see an enormous course correction. Three-month and 6-month EURNOK volatility suggest few risks of such volatility lie over the horizon. Medium to longer term NOK upside via options is a strategy worth consideration.
Table: FX Board of G10 and CNH trend evolution and strength.
The JPY jolted lower on the dovish BoJ today, but the move needs support from global bond yields rising if something bigger is to build in the weak JPY trend. Yields are currently rangebound (and lower today in Europe on Germany’s soft -0.1% work-day-adjusted QoQ GDP print vs. +0.3% expected). The EUR is struggling a bit today, but would need a sharper sell-off to indicate a challenge of the uptrend, while the USD is firm against the weakling commodity dollars and hopeless NOK.
Table: FX Board Trend Scoreboard for individual pairs.
EURUSD and the separation from the 1.1000 area are critical for the trend there, and is the USDCHF downtrend exhausting itself now? AUDUSD has challenged close to range lows today (0.6565).
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