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Althea Spinozzi
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FX Update: Kuroda not for turning. Liquidity driving USD weakness.
John J. Hardy
Chief Macro Strategist
Summary: The yen was shocked lower by a Bank of Japan meeting that failed to deliver anything new, at least in the direction of tightening, as Governor Kuroda appears set for an April exit with no major further tweaks to Bank of Japan policy. While the JPY knee-jerk reaction was large, it may fail to follow through much as global bond yields continue lower as the market prices a soft landing scenario. Elsewhere, the chief development is a fresh weakening of the US dollar, likely on bountiful USD liquidity.
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FX Trading focus: BoJ fails to budge, JPY knee-jerks lower, but… USD lower on plentiful liquidity.
The Bank of Japan not only failed to produce new policy tweaks in the direction of tightening, but even “enhanced” its facility to support banks with up to 10 years of lending against collateral, with a 5-year auction set already for next week. Governor Kuroda piled on with a defiant stance in the press conference, forecasting a decline in CPI to back below 2% by the end of this year and saying it is far too early to declare that inflation has returned. As the market was leaning and hedging for the risk of a widening of the band and more hawkish guidance, as evident in overnight and very short-dated options premiums rising to their highest in years, the non-move delivered an enormous snap-back release of the tension.
It was rather notable that this knee-jerk JPY sell-off was pared significantly in the subsequent hours and worth considering that the specific surprise of the meeting overnight may not deliver a strong new JPY weakening trend. First, the backdrop of falling global yields is a JPY-positive already, and a new aggravated JPY weakening move would likely require fresh fears of the inflationary regime returning in force, taking long yields higher everywhere, with the Bank of Japan seen badly lagging that trend. The other possibly JPY-supportive factor is that Governor will sail off into the sunset at the beginning of April, with the profile of his replacement set to be identified in the coming weeks. If we continue to see weak US data and a drop to new cycle lows in the US 10-year yields, the JPY could revert quickly to strength across the board, with more notable strength in the crosses if we ever get around to fretting bad data (more on that below).
Chart: USDJPY
USDJPY knee-jerked higher on Kuroda’s failure to deliver, but saw much of that move erased by lunch-time in Europe. As note above, the backdrop remains rather JPY supportive despite Kuroda’s stubborn stance, but a broadly weaker US dollar today is another factor, one that may be driven by strong USD liquidity as the US treasury continues to draw down its general account with the Fed, something that is more than offsetting the Fed’s current pace of QT of late. As well, the latest weekly data point on bank reserves held at the Fed jumped some $250 billion while the repo facility dropped by a similar amount.
The USD is weaker again today, with the BoJ story a boon to global liquidity, just as the USD-specific liquidity picture note above in the USDJPY chart description remains a tailwind for USD bears. EURUSD bounced back strongly today after the ECB’s Villeroy this morning denied a story out yesterday afternoon suggesting that unnamed ECB members are increasingly in favour of stepping down the pace of rate hikes to 25 basis points after a likely 50 basis point hike at the February meeting.
Sterling has rushed higher after recent resilient labour-market and earnings data (have to be careful about the seasonality – January and February data needed for a bit more confirmation) and especially after this morning’s slightly hotter than expected December CPI report, which came in a bit stronger than expected. EURGBP has dropped sharply and may be set to explore the full extent of the range down toward 0.8550 if data remains resilient. and GBPUSD is within reach of the 1.2446 pivot high from December, trading as high as 1.2385 as of this writing.
AUDUSD looks a bit oddly hesitant above 0.7000, given the strong fresh surge in metals prices and weaker USD today, but may be waiting for employment data up tonight for next steps, while Q4 CPI data is up next week.
The Norges Bank meeting is up tomorrow, with rather evenly split expectations on the odds for a 25-bps hike, but yields at the front end of Norway’s yield curve in steep retreat and lowest since last August – suggesting even a hike this time or next is likely the last and that guidance will be dovish. Low Norwegian yields aside, NOK is supported by the backdrop of strong risk sentiment and oil poking above the top of the recent range. Tension there…
Table: FX Board of G10 and CNH trend evolution and strength.
The USD scraping bottom here as the most negative trending currency. Interesting to note the energy flagging in the CNH move – is it reverting to more passively following the US dollar? Too early to see if JPY will trend lower – let’s see how we close the week.
Table: FX Board Trend Scoreboard for individual pairs.
EURGBP will flip out of its upside trend on a lose near current levels after stagnating for so long and now selling off sharply. EURCHF has reversed its entire recent rally, though the trend won’t like register that neutralization until tomorrow.
Upcoming Economic Calendar Highlights
- 1330 – US Dec. Retail Sales
- 1330 – US Dec. PPI
- 1400 – US Fed’s Bostic (non-voter) to speak
- 1415 – US Dec. Industrial Production and Capacity Utilization
- 1500 – US Jan. NAHB Housing Market Index
- 1900 – US Fed Beige Book
- 1900 – US Fed’s Harker (voter 2023) to speak
- 0001 – UK Dec. RICS House Price Balance
- 0030 – Australia Dec. Employment Change / Unemployment Rate
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