JPY gives up gains after BoJ signals unease over sharp rise in yields

JPY: Impact of strong CPI report offset by pushback against higher yields

It has been a volatile trading session for the yen overnight. USD/JPY hit a fresh year to date low of 149.29 but the yen has since given back those gains resulting in USD/JPY rising back up to 150.50. The strongest point for the yen overnight was close to the release of the latest CPI report from Japan for January. The report revealed that headline inflation picked up to 4.0% in January from 3.6% in December while measures of core inflation picked up more than expected. The Japanese measure of core inflation excluding fresh food increased by 0.2 percentage point up to 3.2%. Stronger headline inflation was mainly driven by a sharp pick-up in fresh-produce prices. Food prices surged by 7.8%Y/Y up from 6.4% in the prior month and added 0.4 percentage points to headline inflation. According to report, the pick-up in food prices reflected unseasonable weather and labour shortages in rural areas which has been reinforced by the weak yen. At the same time, services inflation slowed to 1.4% in January down from 1.6% in December but it was mainly due to a technical factor. Last year the prices of foreign travel packages captured in the CPI data jumped after the ministry restarted a survey of those prices after a four-year pause during the COVID pandemic. It has  created an unfavourable base effect for this year’s services inflation reading. After stripping out the one time impact of that unfavourable base effect, the underlying pace of services inflation remained solid. Overall, the stronger CPI report should add to the BoJ’s confidence that higher inflation will be sustained in Japan and provide encouragement for further rate hikes.  

However, yields in Japan have since dropped back overnight triggering a reversal of initial yen gains. After hitting a high yesterday at 1.47%, the 10-year JGB yield has dropped back towards 1.40%. The main trigger has been push back from Japanese policymakers against the recent sharp move higher in Japanese bond yields. In response to questions in parliament, BoJ Governor Ueda signalled a readiness to intervene in the JGB market if required. More specifically he stated that “moves in bond yields fluctuate to a certain degree. However, we will purchase government bonds nimbly to foster the stable formation of yields in exceptional cases where long-term yields rise sharply”. He added that it has hard to say when to conduct bond operation in advance and that they would decide by watching the market closely. He explained that the rise in yields reflects economic recovery in Japan and the rising price trend while reiterating the message that the BoJ will raise rates further if economic conditions improve as expected. Nevertheless, a sharper than desired move higher in market yields may also add to the BoJ’s caution over the timing of further rate hikes. Prime Minister Ishiba also expressed “strong concerns” over the fiscal cost for government borrowing from rising yields given Japan’s high debt-to-GDP ratio. Overall, the comments have put a dampener on recent strong gains for the yen driven by narrowing yield differentials between Japan and other major economies.   

JPY SHORTS REMAIN MUCH SMALLER THAN LAST YEAR’S HIGHS

Source: Bloomberg, Macrobond & MUFG GMR

USD: Weakening trend continues as market hopes for better US trade outcome

The US dollar has fallen to fresh lows at the end of this week with the dollar index on course for its third consecutive week of losses and fifth out of the last six weeks. It has resulted in EUR/USD rising back above the 1.0500-level overnight and USD/CNY has fallen back below the 7.2500-level. The ongoing reversal of US dollar strength reflects building investor optimism that President Trump’s trade plans may not prove as disruptive as feared. Market participants are currently viewing Trump’s trade plans as if the glass is half-full at the current juncture. That mentality was again evident yesterday when President Trump was asked about a potential trade deal with China stated that it is “possible”. No further details have been provided but it has encouraged speculation that trade tensions between the US and China may not necessarily worsen further during his second term. It took much longer during his first term to reach a trade deal with China in early 2020 after tariffs had been raised on numerous occasions between 2018 and 2019. That “great trade deal” is widely judged as a failure (click here). At the start of President Trump’s second term, he has already raised tariffs on imports from China by a further 10% which could be reversed quickly if a trade deal is reached. It is  a development that would represent a positive shock for the renminbi and other Asian currencies alongside commodity-related currencies more tightly linked to demand from China like the Chilean peso and Australian dollar.

In contrast, market participants have largely looked through President Trump’s plans/threats this week to: i) hike tariffs by 25% on steel and aluminium from 12^th March and to ii) hike tariffs by 25% on automobiles, semiconductors and pharmaceuticals from 2^nd April. That comes on top of previous plans/threats to: i) hike tariffs by 25% on most imports from Canada and Mexico from 4^th March and to ii) put in place reciprocal tariffs (click here) on all trading partners from 1^st April. The next couple of months is set to be pivotal for US dollar performance. The US dollar should bounce back strongly in Q2 if Trump follows through and implements some of these more disruptive tariffs. We still believe it is premature to drop our forecasts for a stronger US dollar.           

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:30	German Manufacturing PMI	Feb	45.4	45.0	!!
GE	08:30	German Services PMI	Feb	52.4	52.5	!!
IT	09:00	Italian CPI (YoY)	Jan	1.5%	1.3%	!
EC	09:00	Manufacturing PMI	Feb	46.9	46.6	!!
EC	09:00	Services PMI	Feb	51.5	51.3	!!
UK	09:30	Manufacturing PMI	Feb	48.5	48.3	!!!
UK	09:30	Services PMI	Feb	50.8	50.8	!!!
CA	13:31	Retail Sales (MoM)	Jan	--	0.0%	!!
EC	14:30	ECB's Lane Speaks	--	--	--	!!
US	14:45	Manufacturing PMI	Feb	51.3	51.2	!!!
US	14:45	Services PMI	Feb	53.0	52.9	!!!
US	15:00	Existing Home Sales	Jan	4.13M	4.24M	!!!
US	15:00	Michigan Consumer Sentiment	Feb	67.8	71.1	!!
US	16:30	Fed Governor Jefferson Speaks	--	--	--	!
CA	17:30	BoC Gov Macklem Speaks	--	--	--	!!

Source: Bloomberg