FX Update: Further spike lower in JPY brings forward mean reversion. FX Update: Further spike lower in JPY brings forward mean reversion. FX Update: Further spike lower in JPY brings forward mean reversion.

FX Update: Further spike lower in JPY brings forward mean reversion.

Forex 4 minutes to read
John J. Hardy

Head of FX Strategy

Summary:  Another runaway spike lower in the yen today may herald the last phase of a JPY weakening here as the move today will quickly invite an official response if it continues with anything resembling the same force. It is an important week ahead with the end of quarter and Japanese financial year on Thursday and with a few interesting US macro data points through the Friday March jobs report.


FX Trading focus: Fresh spike beginning of end of JPY weakness? Also, the week ahead.

The JPY lurched into an aggravated weakening move today after US treasury yields ripped higher on Friday and then followed through higher still in today’s session to start the new week. Friday saw some mixed messages from the Bank of Japan, which endorsed its current dovish strategy and even claimed that a weak JPY remains an economic boost to the economy, while suggesting it is watching the JPY carefully, with Japan’s Ministry of Finance also weighing in against “disorderly” moves. But the BoJ failed to announce a new auction late last week to actually defend the 0.25% yield cap on 10-year JGB’s when the yield level had reached 0.23% already on Thursday, the same level at which a prior operation was announced. Instead, the BoJ waited until today to announce unlimited backing for the 10-yr JGB’s, a move that aggravated fresh declines in the yen. I have a hard time imagining that this can continue at today’s breathtaking pace (at more than 2% devaluation of the JPY at its worst point today) without a strong check from Japanese officialdom. Stay tuned, in the meantime, maximum danger for trading JPY crosses here.

The JPY volatility noted above adds to the disquiet around the nearly frozen USDCNY exchange rate, as the tension builds between within Asia, with AUD and CNY in the strong column and JPY spiraling into the void. As I also noted Friday, China will try to maintain a firm grip on its exchange rate as long as commodity prices are this elevated.

Bank of England Governor Andrew Bailey was out today with “two-way” rhetoric on inflation, as he frets the same themes that were discussed at the most recent BoE meeting, namely the risk that real GDP growth outcomes look poor as incomes won’t keep pace with rising input prices. He is even using the phrase a “real income shock”. The UK forward curve is predicting as series of further rate tightening moves followed by an eventual series of rate cuts beginning sometime next year (!).

The week ahead has a few data points worth tracking, including the US Conference Board Consumer Confidence number tomorrow. Traditionally, the most relevant coincident indicator for this survey has been the job market, which by all accounts is strong in the US, but inflation concerns are mounting and will watch for contagion into this survey after inflation- and purchasing decision related questions in the University of Michigan Sentiment survey have knocked the levels back to the low end of the range since the global financial crisis. Other highlights include the Feb. PCE inflation number on Thursday and the jobs/earnings data for March on Friday.

Chart: GBPJPY
If the Japanese yen is in part being punished for its reliance on commodity imports, investors should also consider the same effects on sterling, as the UK was already running semi-dire trade deficits before this last winter of spiking energy prices, aggravated by the war in Ukraine, made a bad situation worse. As well, “real” interest rates (inflation less policy rates) are far more negative in the UK than in Japan, even if the purchasing power vis-à-vis commodities is currently hitting Japan harder due to its weak currency. This valuation above 160 looks very rich – not that it can’t extend further in the near term, especially if long yields continue higher as well, but watching these JPY pairs closely as the Japanese financial year comes into view on Thursday and as current levels of volatility may soon be unacceptable to Japan’s political leadership.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Readings continue to get more extreme – mean reversion risks rising, as noted above.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Getting some strong mean reversion intraday in JPY crosses – but too early to call any kind of turn – watching the status of the gold attempt to turn back higher as well here after the sell-off today is trying to reverse as of this writing – if gold can’t pull back higher today, the chart looks bearish for XAUUSD at least tactically.

Source: Bloomberg and Saxo Group

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

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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 Bank 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital 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 Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

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

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination 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. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

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 is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.