FX Update: Tension builds on BoJ policy stance ahead of meeting tonight.

FX Update: Tension builds on BoJ policy stance ahead of meeting tonight.

Forex 6 minutes to read
John J. Hardy

Global Head of Macro Strategy

Summary:  The Japanese government is rolling out a large fiscal package to ease cost-of-living pressures at a time when inflation in Japan supposedly remains muted. This is entirely out of step with the Bank of Japan doubling down on its accommodative policy mix, which has driven the Japanese yen sharply weaker this year. Will the Bank of Japan be forced to capitulate tonight?


FX Trading focus: Bank of Japan meeting tonight as pressure on policy mix mounts, EUR and GBP in for fresh pressure on Russian NatGas threats, AUD and SEK ahead of Riksbank

The JPY has found a bit of support this week on the consolidation in global bond yields. Yesterday saw a strong US 2-year Treasury auction that helped take yields lower at the front end of the curve as well, with risk-off finally strong enough in the background to see US treasuries serving as a safe haven. The falling yields factor by itself brings the JPY some relief, as has the Chinese decision to allow a so-far modest revaluation of its currency lower that will bring more relative support to the JPY if that move is extended.

But to really reset the JPY level back higher after its runs to multi-decade lows in real-effective inflation-adjusted terms, we will need to see a policy change from the BoJ. The BoJ meets tonight, and while very few are expecting a shift, it wouldn’t take much of a hint to suggest the pressure on the BoJ via the weakening currency is becoming too strong to ignore. Even a hint that the Bank is mulling tightening without specifics could be enough to trigger a JPY rally, but spelling out that the bank is willing to tinker with its yield cap policy on 10-year JGB’s would likely spark an even sharper move.

Meanwhile, the political pressure has to be mounting sharply as well: consider that overnight the Japanese government has passed a near JPY 6.2 trillion (approx. $50 billion) stimulus package aimed at offsetting cost-of-living pressures that are sorely felt by the most vulnerable in Japan. This at a time when inflation supposedly remains unsatisfactorily low. For whom the inflation bell tolls is an critical question both in Japan and globally as we have to consider that these cost of living pressures that may only measure in the mid- to high single digits nationally could weigh 20% or more for the consumption basket at the lower end of the income spectrum, in terms of rent, heating, food, etc. It’s an explosive cocktail for politicians and Japan is set for important lower house elections in July. The BoJ may not move tonight, but it can’t remain an immovable object in a rapidly moving world forever. Keep in mind that Japan is on holiday Friday and out for much of next week, so this could aggravate the volatility if the BoJ does deliver any new guidance or policy twists.

Chart: USDJPY
Watching the USDJPY pair and JPY crosses closely tonight over the Bank of Japan meeting for the reasons outlined above. Technically, the pair seems to have shied away from a test of the 130.00 level, while on the downside, any BoJ policy surprise could deliver tremendous intraday volatility – easily 125.00 or lower, given that the recent break level to the upside was all the way down at 116.35. JPY traders should tread carefully, considering long volatility plays in the options market if wanting to express a short-term view. JPY cross action may prove higher beta than the reaction in USDJPY itself. As well, Japan will be out on holiday over next week during the May 4 FOMC meeting so liquidity may prove thinner than usual. If we see Kuroda-san doubling down on the existing policy and a fresh surge in global yields, the uptrend could be reinvigorated for a try toward 135.00. It’s a pivotal week for USDJPY either way, in all likelihood.

Source: Saxo Group

Fresh euro woes. The euro touched new five-year lows versus the US dollar today, in part on general risk off, but perhaps even more so after Russia used Poland and Bulgaria as guinea pigs in its threat to cut off supplies of natural gas for importers unwilling to pay for the gas in rubles. Poland saw the writing on the wall on Russian gas a long time ago and had moved to reduce its reliance before the war in Ukraine and has considerable coal-based power it can mobilize to cover some  of the shortfall, so the impact on the zloty is considerable, but need not spin out of control. Alas, Germany is the chief focus as a full shutdown would crater German economic growth on the need to ration supplies. Meanwhile, ECB member Kazaks said yesterday he is in favour of a July ECB hike – looks like consensus is gelling on that timing for lift-off.

The UK does not import Russian gas, but is under as much pressure as any other European country on the impact of any Russian supply disruptions because it is connected to the continent’s gas network and suffers the price rises together with the continental countries. An excellent commentary from Bloomberg’s Marcus Ashworth lays out the pressures on the UK economy here as it faces a “trilemma of high inflation, slowing growth and rising taxes”, with a collapsing currency possibly forcing the Bank of England to hike rates more than it would otherwise do (watching EURGBP as much as GBPUSD for the relative pressure on the UK as I would have already expected sterling to underperform more there than it has). GBPUSD looks set for a test of 1.2000 and possibly more to the downside if we are set for a significant deleveraging event across risky assets here.

The Aussie tried to get a boost on news overnight that Chinese leader Xi Jinping called for an “all out” infrastructure building push to spark economic growth, but there are few details. As well, short Australian yields touched new cycle highs while yields elsewhere consolidated after the Q1 Australian CPI report came in far hotter than expected at 5.1% YoY vs. 4.6% expected and the core “trimmed mean” was out at 3.7% YoY vs. 3.4% expected. This has strongly raised the odds of a rate hike at the RBA meeting next Tuesday to above 70%. The solid drop in the trade-weighted AUD in recent days after it had spiked to near a 5-year high has likely helped the RBA to go ahead and just get started already.

The Riksbank is widely expected to deliver its first rate hike since moving away from NIRP last year, with a 25 basis point move. Watch the rate guidance after Governor Ingves recently failed to push back against the market pricing a greater than 2% policy rate by the beginning of 2024 – while the February Riksbank meeting still forecast lift-off not to arrive until 2024! I like fading EURSEK upside, but the risk deleveraging here makes this hazardous tactically.

Table: FX Board of G10 and CNH trend evolution and strength.
Note especially the enormous positive momentum shift in the JPY head of tonight’s BoJ meeting – will BoJ deliver something that spikes momentum further or back to the downtrend? The USD uptrend reading of 8 is getting into extreme territory, but won’t necessarily calm if risk deleveraging continues/accelerates.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The “hottest” market in a long while, as can be seen in all of the extreme ATR readings (the dark orange color indicates we are in the top decile of volatility in ATR over last 1000 trading days).

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – US Mar. Advance Goods Trade Balance
  • 1400 – US Mar. Pending Home Sales
  • 1600 – ECB President Lagarde to speak
  • 2100 – New Zealand RBNZ deputy Hawkesby to speak
  • 2230 – Canada Bank of Canada Governor Macklem to speak in Senate testimony
  • 2350 – Japan Mar. Industrial Production
  • 0100 – New Zealand Apr. ANZ Business Confidence survey
  • 0130 – Australia Q1 Export / Import Prices

Quarterly Outlook

01 /

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

Content disclaimer

The information on or via the website is provided to you by Saxo Bank (Switzerland) Ltd. (“Saxo Bank”) for educational and information purposes only. The information should not be construed as an offer or recommendation to enter into any transaction or any particular service, nor should the contents be construed as advice of any other kind, for example of a tax or legal nature.

All trading carries risk. Loses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money.

Saxo Bank does not guarantee the accuracy, completeness, or usefulness of any information provided and shall not be responsible for any errors or omissions or for any losses or damages resulting from the use of such information.

The content of this website represents marketing material and is not the result of financial analysis or research. It has therefore has not been prepared in accordance with directives designed to promote the independence of financial/investment research and is not subject to any prohibition on dealing ahead of the dissemination of financial/investment research.

Please refer to our full disclaimer and notification on non-independent investment research for more details.
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-ch/legal/disclaimer/saxo-disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) Ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law. 

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.