FOMC could test Tokyo’s JPY weakness appetite

JPY: FOMC communication will be key for JPY

It’s Vernal Equinox Day in Japan today, a vacation to effectively mark the commencement of spring but despite the vacation the authorities in Japan will likely be watching the foreign exchange market closely given the reaction to the BoJ’s termination of negative rates in Japan and ultimately the end of the QQE policy framework has been met by further selling of the yen. The 1.2% jump in USD/JPY yesterday has taken the pair to within one big figure of the high recorded in November last year as investors concluded that the cautious guidance by Governor Ueda yesterday signalled a high probability that yesterday’s increase in the policy rate was a ‘one-and-done’ policy action. We don’t agree with that interpretation but understand the cautious communications as providing justification for such a conclusion.

While the yen clearly underperformed on the back of this interpretation of the BoJ announcement, there was also broad positive momentum for the dollar as well and the FX market yesterday was clearly positioning for the potential of the FOMC tonight to provide a more hawkish communication following two months in which US inflation has proved more sticky than expected. The primary risk as we see it is that the FOMC drops a dot from its median dot profile of moves in the fed funds this year from three rate cuts to just two. That action alone would most likely lift yields and help support the dollar. Still, the OIS market is not hugely out of kilter with that scenario at 20bps of more cuts. If you consider in January, the markets were priced for 150bps of cuts when the Fed was signalling just 75bps, a 20bp divergence now with 9mths of the year remaining does not seem particularly excessive.

So a bigger move for yields and the dollar would likely come from not the change in the dots profile from three cuts to two but the communications from Fed Chair Powell that accompanies such a change. From that perspective in our view it is difficult to see a marked shift in tone from recent communications. Remember it was only two weeks ago that Powell stated in his semi-annual testimony that the Fed was “not far” from where the Fed needs to be to start cutting rates.

Has enough changed for Powell to want to move away from that view? Yes, we’ve had the inflation data but while that was higher than expected, it alone doesn’t seem enough for a shift in view. We will have three CPI, NFP and PCE data releases before the FOMC meeting on 12^th June (same day as the May CPI data) and hence there’s plenty of data to offer justification to cut by then. The Beige Book for this meeting also revealed a more cautious consumer with consumption shifting away from discretionary spending. The labour market eased further and there was increasing evidence of increased difficulty for companies passing on higher costs. So we expect a reasonably balanced Fed communication tonight, no matter what the median dots profile indicates for this year and that should help curtail further US dollar buying and weaken the current positive momentum (certainly the case of course if the dots profile is unchanged).

If we are incorrect on that, then FX could get interesting as a hawkish communication could see Tokyo’s resolve over limiting yen depreciation being tested. A Tokyo holiday could exacerbate a move higher and a breach of the 2023 high is certainly feasible. A break of that high could well be accepted in Tokyo but we would still assume intervention would happen quite soon after that, especially with the BoJ’s action this week at least now consistent with yen buying intervention.

LONG-TERM US YIELDS NOT AS SUPPORTIVE AS WHEN USD/JPY WAS LAST TRADING AT THESE HIGHS

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Weaker than expected CPI but services a little stronger

The pound has not moved much in response to the February CPI data just released. The data revealed overall and core measures falling 0.1ppt more than expected to 3.4% and 4.5% respectively. The headline gain is the weakest since September 2021, while the core gain was the weakest since January 2022. Services CPI, a big focus for the BoE, also fell from 6.5% to 6.1%, but by 0.1ppt less than expected. The CPIH data which gets less attention in the markets but includes Owner-Occupier Housing revealed that component accelerated from 5.4% to 6.0% - the highest annual rate since July 1992. The largest downward contributions in both CPI and CPIH came from food, restaurants and cafes while the biggest upward contributions came from housing and household services and motor fuels.  

The 6.1% annual gain in services inflation will still be the area of concern for the BoE when the MPC meets tomorrow. In all likelihood the level of services inflation will encourage continued caution by the MPC that has plenty of justification for signalling the need for more time to monitor disinflation trends before deciding on cutting rates. That said, the headline estimate from the BoE in its February Monetary Policy Report was for an annual increase of 3.60% in Q1 2024. With two months of data, the reading now stands at 3.26%. The m/m gain in CPI in March 2023 was 0.8% suggesting a good chance of a further slowdown in YoY CPI in March. So the BoE is on course for a miss to the downside that should help ease overall CPI concerns.

The MPC meeting tomorrow may see a change in the vote composition. In February the vote was 6-2-1 with Dingra the voter for a cut. Mann and Haskel voted to hike and we could see one or both drop their votes for a hike and join the majority but overall we expect pricing for the first cut in August to be largely maintained, limiting moves for the pound. Overall the required caution on monetary easing will continue to support the pound, which remains the top performing G10 currency year-to-date along with the US dollar.

UK SERVICES CPI DECLINE CONTINUES TO LAG BEHIND

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	08:45	ECB President Lagarde Speaks	--	--	--	!!!
UK	09:30	House Price Index (YoY)	--	-0.7%	-1.4%	!
EC	09:30	ECB's Lane Speaks	--	--	--	!!
EC	10:00	Construction Output (MoM)	Jan	--	0.80%	!
US	11:00	MBA Mortgage Applications (WoW)	--	--	7.1%	!
EC	13:45	ECB's Schnabel Speaks	--	--	--	!!
EC	15:00	Consumer Confidence	Mar	-15.0	-15.5	!
GE	16:45	German Buba President Nagel Speaks	--	--	--	!!
CA	17:30	BOC Summary of Deliberations	--	--	--	!!
US	18:00	Interest Rate Projection - end-2024	Q1	--	4.6%	!!!!
US	18:00	Interest Rate Projection - end-2025	Q1	--	3.6%	!!!!
US	18:00	FOMC Economic Projections	--	--	--	!!!
US	18:00	FOMC Statement	--	--	--	!!!!
US	18:00	Fed Interest Rate Decision	--	5.50%	5.50%	!!!
US	18:30	Powell Press Conference	--	--	--	!!!!!

 

Source: Bloomberg