JPY remains on softer footing ahead of upcoming BoJ policy meeting

JPY: Japanese politics & BoJ policy update in focus   

The yen has continued to weaken modestly overnight resulting in USD/JPY moving back up to 134.50. So far this month the yen has been one of the worst performing G10 currencies alongside the New Zealand dollar and Norwegian krone. It has failed to strengthen alongside the other traditional safe haven currency of the Swiss franc which has been the best performing G10 currency this month. The ongoing underperformance of G10 commodity currencies highlights that global growth remains a concern amongst market participants. The price of crude oil has almost fully reversed initial gains after the surprise announcement at the start of this month from OPEC+ members that they are going to cut production (click here). The yen on the other hand has been undermined this month by the pick-up in yields after they hit a low last month following the loss of confidence in the banking sector. The 2-year US Treasury yield has risen by around 70bps from last month’s intra-day low on 24^th March. The timing has coincided with USD/JPY rising from an intra-day low 129.64 on 24^th March up to the recent high of 135.13 on 19^th April. Furthermore, the yen has been undermined by the scaling back of expectations for an adjustment in BoJ policy settings as soon as at this week’s policy meeting. It will be Kazuo Ueda’s first policy meeting as the new Governor. He spoke in parliament overnight and again downplayed expectations for a shift in policy at his first policy meeting. He stated clearly that they are “not at the stage to talk about how to normalize yield curve control”. He believes that “premature talk on tweaking YCC could confuse the market”. One condition he set for normalizing monetary policy would be “if underlying prices were to hit 2%”. The dovish comments will reinforce market expectations for no change in BoJ policy this week. The updated economic projections could be of more interest if they show inflation moving closer to their 2% target, with the FY2025 forecasts released for the first time.

Our analysts in Tokyo still expect the BoJ to abandon YCC this year but have recently pushed back the timing to the July policy meeting from June. Recent dovish comments from new Governor Ueda support their decision alongside their expectation that Prime Minister Kishida will call an early election in the coming months which would make it more difficult for the BoJ to adjust policy settings in the near-term. Speculation over early elections in Japan have been supported by the performance of the LDP in by-elections held over the weekend. Five by-elections were held and the LDP won four out of five seats although it was close call. It has been speculated that Prime Minister Kishida will call early elections after Japan holds the G7 Summit between 19^th and 21^st May. However, Prime Minister Kishida continued to deny overnight that he “thinking about calling an election”. While the prospect of an imminent shift in BoJ policy has diminished recently, we still believe that the yen will strengthen further this year and view recent weakness as only temporary. We expect USD/JPY upside to be capped between 135.00 and 137.00 in the near-term.   

LEVERAGED FUNDS HAVE RECENTLY BUILT UP USD LONGS

Source: Bloomberg, Macrobond & MUFG GMR

USD: Changes in relative growth & inflation are moving against the USD

The USD has staged a modest rebound over the past week after the dollar index hit a year to date low on 14^th April at 100.79. The USD has derived support from the scaling back of more dovish expectations for Fed policy. The rate market has moved to fully pricing in one more 25bps hike from the Fed in the current tightening cycle, and is now only fully pricing in one 25bps rate cut by the end of this year. However, the scope for US yields to continue moving higher from here should prove more limited. Recent comments from New York Fed President Williams signalled that he would be comfortable with the Fed delivering just one more hike then pausing their hiking cycle. At the same time, the incoming economic data flow continues to signal an increasing risk of sharper slowdown/recession for the US economy that will open the door for rate cuts later this year. The Conference Board’s leading index has contracted for twelve consecutive months now and recorded its largest monthly decline in March since the worst point of the COVID shock back in April 2020. In contrast, the growth outlook has been improving outside of the US. Economic growth in China surprised significantly to the upside in Q1, and leading economic indicators in Europe  including the PMI surveys for April released at the end of last week have signalled that downside risks to growth continue to ease at the start of this year.   

Alongside the relative deterioration in the US growth outlook, there has also been more evidence recently of disinflationary pressures in the US compared to in Europe that favours the Fed pausing their hiking cycle ahead of the BoE and ECB. Inflation and wage growth proved much stronger than expected in the UK last week reinforcing expectations for the BoE to deliver another 25bps hike next month and have lifted expectations for the terminal rate closer to 5.00%. Similarly, in the euro-zone the latest CPI report revealed that core inflation and food inflation rose to fresh cyclical highs in March. Recent comments from ECB officials including Chief Economist Lane have even left the door open to another larger 50bps hike next month. The release of the ECB’s bank lending survey on 2^nd May could prove pivotal in determining the size of the hike. We see room for short-term yield spreads to keep moving against the USD in the near-term. The main risk to that view in the week ahead will be the release next Friday of the latest US Employment Cost Index for Q1. In these circumstances, we still expect the USD weaken further against other major currencies despite the recent modest rebound. Growth concerns are though helping to prevent the USD from weakening against G10 commodity currencies. In our latest FX Weekly report (click here), we recommended adding a new long EUR/USD trade idea

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	German Ifo Business Climate Index	Apr	94.0	93.3	!!!
EC	10:00	ECB's Panetta Speaks	--	--	--	!!
US	13:30	Chicago Fed National Activity	Mar	-0.02	-0.19	!
CA	13:30	New Housing Price Index (MoM)	Mar	-0.5%	-0.2%	!!
US	15:30	Dallas Fed Mfg Business Index	Apr	-14.6	-15.7	!

Source: Bloomberg