First signs of renewed focus on USD/JPY in Tokyo

JPY: Renewed weakness risks raised concerns

On a year-to-date and quarter-to-date basis, the yen is the second worst performing G10 currency with only NOK performing worse. Prior to yesterday, the yen was the third worst performing G10 currency in May but outperformed yesterday and was the top performing currency. This outperformance reflected the decline in global yields and perhaps more importantly the decision in Tokyo to convene a meeting between the FSA, MoF and BoJ. It was the first time a meeting between the three was held since 17^th March following the banking sector turmoil then. Before then there were meetings ahead of the bouts of FX intervention to halt the sustained selling of the yen.

The comments from Vice Finance Minister for International Affairs, Masato Kanda, were nothing out of the ordinary, repeating the common statement that “excessive moves aren’t desirable” and that the government was monitoring the markets and would take action if required. The yen initially weakened on the back of there being no new statements made but then strengthened given this does mean we are on the cusp of entering a range for USD/JPY that could firstly trigger more abrupt opposition and eventually potentially actual intervention. Disorderly price action is somewhat subjective but based on the price action ahead of the episodes of intervention in September and October of last year, a five big-figure move in USD/JPY over a relatively short period of time – 3 to 10 days – would be enough to meet Tokyo’s definition of disorderly price action. The MoF/BoJ intervened on 22^nd September, which followed a move in USD/JPY from 140 to 145 in three days although it took a further ten days before intervention took place but there were some large swings on those days. The second episode (21^st & 24^th October) followed a move from 145 to 150 in nine trading days, and was followed immediately by intervention.

The authorities may have picked yesterday for their latest tri-party meeting for two reasons. First, snap election speculation persists in Japan and politics may have played a role here. The country-wide gasoline subsidy ends on 1^st June and the cost of living is a big focus in Japan and hence the authorities will wish to be heard giving warning over yen depreciation which has played a big role in fuelling energy inflation.

Secondly, the authorities may be looking ahead and anticipating the risk of a leg lower in the yen. The debt ceiling issue has been resolved and a strong jobs report at the end of the week would likely see markets price more fully a Fed rate hike on 13^th June that would likely then lead to further USD/JPY buying.

USD/JPY has advanced five big-figures in nine trading days to last Friday, so the move is within the range of past action. That at least may have played a role in the decision to hold a meeting. If events fuel another quick move to the 145-level, above there would certainly be in the range of intervention. It would in addition serve to highlight another unwelcome by-product of YCC and could play a role in swaying Governor Ueda to scrap YCC later this year.

JAPAN IMPORT PRICES VS USD/JPY – YOY CHANGE

Source: Bloomberg & MUFG Research calculations

EUR: Global growth concerns, weak inflation feed downside risks

The release prior of the China Beige Book that revealed that China manufacturing activity had picked up “notably” was certainly not evident in the PMI data from China today, which revealed a drop in the manufacturing index from 49.2 to 48.8, the third consecutive drop from the initial high reached on covid reopening optimism. The continued stream of weak data from China is reinforcing investor concerns over global growth that could soon translate into further declines in commodity prices. Brent crude oil fell 4.5% yesterday with Asian equities and Europe and US equity futures all down on the day. The Hang Seng China Enterprise Index is down over 3% and CNY is underperforming in FX. While global growth optimism continues to fade, the markets at the same time has removed nearly all of the monetary easing priced in the US by the end of the year. These developments are ideal for a strengthening US dollar which looks set to extend further over the short-term.

The move lower in EUR/USD has been reinforced by the prospect of the ECB being able to move to a pause sooner than previously thought. Inflation data from Spain was much weaker than expected yesterday – the headline annual rate fell from 3.8% to 2.9% in May while the core rate fell from 6.6% to 6.1%. An initial regional CPI data release this morning from Germany was also weaker than expected.

However, weaker inflation data now is unlikely to alter plans over the coming two meetings to hike twice by 25bps so we don’t see weaker inflation as a negative for EUR at this point. But worsening global growth conditions are a clear dollar positive which will help keep the dollar well supported into the jobs data on Friday.

CNY IS UNDERPERFORMING & IS 2^ND WORST PERFORMER IN ASIA IN MAY

Source: Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:55	German Unemployment Change	May	14K	24K	!!!
GE	08:55	German Unemployment Rate	May	5.6%	5.6%	!!
IT	09:00	Italian GDP (QoQ)	Q1	0.5%	-0.1%	!
SZ	09:00	ZEW Expectations	May	-36.8	-33.3	!!
EC	09:00	ECB Financial Stability Review	--	--	--	!!
UK	09:30	Mortgage Approvals	Apr	--	52.01K	!
UK	09:30	Mortgage Lending	Apr	--	0.02B	!
IT	10:00	Italian HICP (MoM)	May	-0.1%	0.9%	!!
IT	10:00	Italian HICP (YoY)	May	7.8%	8.7%	!!
US	12:00	MBA Mortgage Applications (WoW)	--	--	-4.6%	!
GE	13:00	German HICP (MoM)	May	0.8%	0.6%	!!!
GE	13:00	German HICP (YoY)	May	7.8%	7.6%	!!!
CA	13:30	GDP (MoM)	Mar	0.2%	0.1%	!!!
CA	13:30	GDP (QoQ)	Q1	0.4%	0.0%	!!
CA	13:30	GDP Annualized (QoQ)	Q1	1.5%	0.0%	!!
EC	13:30	ECB President Lagarde Speaks	--	--	--	!!!!
US	13:50	FOMC Member Bowman Speaks	--	--	--	!!!
UK	14:15	BoE MPC Member Mann	--	--	--	!!!
US	14:45	Chicago PMI	May	47.0	48.6	!!
US	15:00	JOLTs Job Openings	Apr	9.775M	9.590M	!!!
SZ	16:00	SNB Board Member Jordan Speaks	--	--	--	!!
US	17:30	FOMC Member Harker Speaks	--	--	--	!!!
US	18:30	Fed Governor Jefferson Speaks	--	--	--	!!!
US	19:00	Beige Book	--	--	--	!!

Source: Bloomberg