Asia FX Talk - I will neither confirm nor deny

Ahead Today

G3: FOMC Fed Meeting (2 May morning), Australia Retail Sales, Eurozone CPI, US Consumer Confidence, US Employment Cost Index

Asia: China Manufacturing and Non-Manufacturing PMI

Market Highlights

USDJPY made it to the moon and back, rising all the way to a peak of 160 at one point yesterday during Asia trading time, before plummeting closer to the 155-156 handle. Thin liquidity due to Japan being on holiday partly contributed to the volatility. There was nonetheless also intense speculation that Japan’s Ministry of Finance finally intervened, after weeks of jawboning the weakness in the currency and threatening to actually come into the market. Japan’s top currency official Masato Kanda would neither confirm nor deny “for now”, and said that officials will take appropriate action against excessive moves, and is ready to take action 24 hours a day.

Overall, we think that direct intervention to support the Yen can slow the weakening trend, but for a more lasting change this also requires a change in economic fundamentals, and chiefly the high real interest rate differentials between US and Japan (see Global FX Daily). This is certainly true when we look at historical period of JPY Buying/USD Selling interventions, with the most effective ones being when you saw a turn in fundamentals such as weaker US inflation prints in October 2022.

Regional FX

Meanwhile, the US Treasury now expects to borrow US$243bn in 2Q, a higher borrowing estimate than the US$202bn it announced in 1Q, with the treasury still assuming a US$750bn end-of-quarter balance. The announcement was bearish at the margin for Treasuries but led to roughly unchanged US Treasury yields at the end of the day.

The big event this week is certainly the FOMC meeting out early morning Asia time on 2 May, and markets will watch closely for how hawkish Chair Powell will be and any signals on the path of interest rates ahead.

Regional FX

Asian FX markets traded mixed despite support from a stronger JPY and a weaker Dollar. There was some divergence amongst Asia currencies, with CNH in particular rising by 0.3% against the Dollar, while the likes of IDR underperformed declining 0.4% likely due to bond outflows. China in particular has seen quite positive sentiment in its equity markets both in the A shares and H shares market, with US$3.1bn of inflows last Friday coupled with US$1.5bn of inflows on Monday. It remains to be seen whether this move is just driven by speculation and can be sustained due to a turn in economic fundamentals. Today’s China non-manufacturing and manufacturing PMIs will be important in this regard.