JPY: Japan steps up verbal intervention as it continues to underperform

It has been a more volatile trading session overnight for the yen with USD/JPY dropping to a low of 158.27. The stronger yen was triggered by another step up in verbal intervention from Japanese policymakers. Finance Minister Katayama highlighted that she told G7 members at yesterday’s meetings that Japan is watching FX with a high sense of urgency. US Treasury Secretary Scott Bessent did not attend the meetings but Finance Minister Katayama stated that she had also discussed FX with him earlier in bilateral talks. It quickly follows on from comments yesterday in which she said that they “definitely need to calm markets” and agreed to stay in close contact with Scott Bessent. The latest comments indicate a higher risk that Japan is moving closer to intervening directly to support the yen with USD/JPY still threatening to break above the 160.00-level. The yen has continued to underperform even as the US dollar has corrected sharply lower in recent weeks. The yen has been the second worst performing G10 currency since the US-Iran ceasefire was announced on 7^th April.

Building investor optimism over a deescalation of the conflict has encouraged a sharp improvement in global investor risk sentiment making yen-funded carry trades relatively more attractive as financial market volatility has dropped back lower as well. While FX market volatility has picked up in response to the energy price shock, it has remained relatively low. MSCI’s ACWI global equity index hit a fresh record high yesterday highlighting the sharp improvement in global investor risk sentiment indicating that market participants appear increasingly willing to look through short-term energy supply disruption. Building investor optimism has been encouraged further by reports that the US and Iran are considering a two-week ceasefire extension to allow more time to negotiate a peace deal. According to a person familiar with the matter, the extended ceasefire would allow both sides to hold further talks although the extension is not yet officially confirmed. On the other hand, the Washington Post has reported that the US is sending thousands of additional troops to the Middle East I the coming days to pressure Tehran into making a deal or to prepare for strikes if the ceasefire ends. At the same time, it has been reported that Israel is considering a ceasefire with Lebanon as well. According to Lebanese officials, a truce between Israel and Hizbollah could be announced “soon” and come into effect “this week”.

The recent underperformance of the yen has also been encouraged by delayed expectations for further BoJ rate hikes. The Japanese rate market is now only pricing in around 5bps of hikes from the BoJ later this month after Governor Ueda failed to provide a clear signal to prepare the market for a hike earlier this week (click here). A Bloomberg report has since been released stating that the BoJ is set to closely monitor the balance between the impact on the economy and prices as well as developments in the Middle East until the last possible moment. The report suggests the possibility of a widening divergence of policy views amongst BoJ officials. It suggests that an April hike can’t be completely ruled out but still appears less likely now. By delaying the timing of the next rate hike, the BoJ is increasing pressure on the government to support the yen in the near-term.

VOL SHOCK HAS BEEN RELATIVELY MUTED IN FX MARKET 

Source: Bloomberg, Macrobond & MUFG GMR

EUR/GBP: Initial Middle East conflict losses have been fully reversed

The euro and pound have now fully recovered all of their initial losses against the US dollar since the Middle East conflict. EUR/USD was trading just above the 1.1800-level in late February and cable at around 1.3550. The easing of safe haven demand triggered by the outbreak of the conflict has triggered a reversal of US dollar strength which has occurred much more quickly than we had been expecting (click here). The euro and pound have been supported as well by falling energy prices reflecting optimism that risks from energy supply disruption will ease if a lasting peace deal can be reached soon. The price of natural gas in Europe has fallen by around a third from the peak in mid-March. Lower energy prices are helping to ease concerns over the negative impact on growth in the region. There was also some good news this morning from the UK where the latest monthly GDP report for February revealed that economy was growing much more strongly than expected heading into the energy price shock. Monthly GDP can be volatile but expanded strongly by 0.5%M/M in February which was the strongest monthly reading since last April.

At the same time, the euro and pound have derived support recently from hawkish comments from BoE and ECB officials indicating that they are preparing the ground for rate hikes in response to the energy price shock. In contrast, Fed officials have indicated they are more prepared to look through higher inflation in the near-term. However, there has been some back tracking from the both the BoE and ECB suggesting that they want to take more time to assess the fallout from the energy price shock before hiking rates. Bloomberg has now reported that ECB officials are said to be leaning toward an April hold. According to people familiar with the debate, tighter financing conditions are helping to keep inflation expectations anchored for the moment, and a hike wouldn’t necessarily alter market pricing much. We still expect the ECB to deliver 50bps of tightening but the timing of the first hike is likely delayed until June or July which could help dampen the euro’s upward momentum.