BoJ warn again of surprise policy decisions

JPY: BoJ warn of policy surprise risk again

The reversal trade continues this week with the Japanese yen and then the Swiss franc the two worst performing G10 currencies after being the best two last week. The easing of banking sector concerns has helped encourage the reversal of this risk aversion-related trade last week. US President Biden yesterday stated that the US banking crisis was not over yet but for now market participants appear happy to trade away the moves from last week. Still, there’s some way to go, in rates in particular, for that move to reverse – the markets still expect over 60bps of Fed easing by year-end.

USD/JPY is the big mover today on that basis and it is clearly been driven by factors abroad although comments today serve as a reminder that domestic factors should not be ignored and could still suddenly influence JPY direction. New Deputy Governor Shinichi Uchida was answering questions in the Diet today and stated that adjustments to the YCC policy framework should be implemented without any guidance at all from the BoJ and hence will likely come as a surprise to the markets. Incoming Governor Ueda made a similar comment in his Diet nomination hearings by stating that policydecisions often inevitably contain surprises. Is this a coincidence or is there a concerted effort of the new leadership team to pre-explain the inevitable?

Given the nature of the YCC framework we should certainly expect a surprise. The SNB in 2015 removed the EUR/CHF floor and was a big surprise for the markets. A change by the BoJ will be similar. Doing it sooner rather than later may well be considered especially given the reduced upward pressure on yields now. That element of uncertainty and the risk of a sudden change in monetary policy will likely limit the extent in which the yen can weaken from here going forward.

G10 FX PERFORMANCE SO FAR THIS WEEK – JPY & CHF UNDERPERFORM

Source: Macrobond & Bloomberg; as of 0730 29^th March

USD: Economic impact not seen in consumer confidence data

The US dollar weakened modestly further yesterday (although it’s rebounding today) and there was limited reaction to the consumer confidence data, which clearly surprised to the upside. Market participants didn’t read too much into this data given we have the jobs report and ISM data next week. Banking sector sentiment remains key for now and the gradual improvement in sentiment that has yet to take US yields further higher relative to elsewhere is curtailing the degree of US dollar rebound.

The data was nonetheless important from the perspective of giving the markets the first glance at the potential fallout amongst US consumers from the banking sector turmoil that escalated from 8^th March. The Conference Board survey cut-off date was 20^th March – well after the turmoil escalated. Unsurprising, the consensus was for confidence to drop but in fact the overall index jumped 103.4 to 104.2. This was down to the expectations index jumping from 70.4 to 73.0. Expectations tend to be shaped by the performance of the equity markets – the above chart is the 3mth change in the S&P 500 versus the expectations component. Of course one of the stand-out takeaways from the recent weeks of banking sector turmoil is how isolated it has been to banking sector stocks. The S&P 500 Bank Index is 20% down in March while the S&P 500 is basically unchanged. US households’ expectations have therefore not been impacted which suggests the US consumer will not retrench based on developments so far. A change in banks appetite for risk via decreased lending could still lie ahead and that could shape overall equity market performance later in the year.

But certainly in the meantime it is difficult to envisage the current divergence in policy expectations being sustained if the data from the US remains resilient. The OIS market currently implies 50bps of hikes by the ECB by September while the market is 80% priced for a 25bp rate cut from the Fed by then. Without further banking sector turmoil, data flow will dictate the sustainability of that degree of divergence in policy expectations and based on the consumer confidence data there is a greater risk of that divergence closing which could see EUR/USD again run out of steam as we move toward the 1.1000-level.

GBP: Bank deposit data more in focus  

Given the nature of the onset of the collapse of Silicon Valley Bank (massive deposit flight in record speed USD 42bn in 24hrs) there is more focus on data on bank deposits. The FT yesterday highlighted the euro-zone bank deposit data revealed in the M3 money supply data and today the UK will release M4 money supply data which will cover deposits levels/changes in the month of February.

The UK data to January revealed an increase of GBP 3.5bn in deposits from households. The euro-zone data revealed a EUR 20.6bn reduction in household bank deposits in February, the largest drop since the data series began in 2003. We may hear reports today if the UK data reveals a drop although it is worth remembering that in an environment of rising interest rates there does tend to be reductions in certain deposit accounts as depositors become more sensitive to yield. Banks are notoriously slow in lifting interest rates on deposit accounts and hence deposits can shift into fixed rate instruments with higher returns not captured in the data. Like the euro-zone data, this would not be  indicative of a loss of confidence in banks.

GBP remains the 3^rd best performing G10 currency in March and it’s relatively small medium-to-small sized banking sector could be providing some support.

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
IT	09:00	Italian Monthly Unemployment Rate	Feb	7.8%	7.9%	!
SZ	09:00	ZEW Expectations	Mar	--	-12.3	!!
UK	09:30	BoE Consumer Credit	Feb	1.300B	1.597B	!!
UK	09:30	M4 Money Supply (MoM)	Feb	0.9%	1.3%	!
UK	09:30	Mortgage Approvals	Feb	40.50K	39.64K	!
UK	09:30	Mortgage Lending	Feb	2.40B	2.54B	!
UK	09:30	Net Lending to Individuals	--	3.7B	4.1B	!
UK	10:30	BoE FPC Meeting Minutes	--	--	--	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	3.0%	!
SZ	14:00	SNB Quarterly Bulletin	--	--	--	!
US	15:00	Pending Home Sales (MoM)	Feb	-2.3%	8.1%	!!
US	15:00	Pending Home Sales Index	Feb	--	82.5	!
CA	17:30	BoC Deputy Governor Gravelle Speaks	--	--	--	!!
US	18:00	7-Year Note Auction	--	--	4.062%	!!
UK	19:50	BoE MPC Member Mann	--	--	--	!!
EC	21:40	ECB's Schnabel Speaks	--	--	--	!!

Source: Bloomberg