Global Institute of Trading


We wrote last week that risk markets were struggling to climb a growing wall of worry, with sentiment catching down with decelerating global activity. Meanwhile, some central banks are starting to deliver on more hawkish guidance in the face of these risks with 50bp policy moves, and the Fed looks well on pace to join them in early May. We believe these trends have further to go and play USD positive.

USD overview

US March core CPI came in slightly lower than expected, marking the first downside miss for core CPI m/m vs. consensus since August. But the USD traded resiliently despite the deceleration in core inflation, which is appropriate in our view. The details of the CPI suggest the lower core print may not last, while the PPI reminded that price pressures are widespread. Our view for multiple 50bp hikes over coming meetings remains intact, though the risk-reward for marginal Fed hawkish pricing has likely lessened as a USD positive. Our rates colleagues have turned more neutral on USTs.

Japan’s Ministry of Finance stepped up its verbal jawboning of the weak JPY this week but, in this case, we think actions would speak louder than words. USD/JPY has traced very closely with yield differentials, and widening yield differentials against the JPY during times of rising global interest rates is an intended feature of the BoJ’s YCC policy. Absent a wholesale BoJ policy shift, the risk/reward may remain on the topside for USD/JPY. A majority of Japanese investors we surveyed in April agree. We do expect some stabilization in US yield to provide some relief for the JPY, though as noted above the reprieve from lower CPI this week may prove short-lived.

Source: NatWest

BOJ's Kuroda's Warning

Bank of Japan Govenor Haruhiko Kuroda said recent rapid yen moves were fueling negative effects on the economy in remarks that sparked a strengthening of the Yen.

“Recent yen moves have been very rapid,” said Kuroda in response to a question in parliament on Monday. “Signiciantly weak yen or very rapid moves fuel the negative effects.” 

Kuroda is escalating his rhetoric after describing the Japanese currency as “somewhat weak” earlier this month. Still, Kuroda maintained his view that a weak yen is positive for the economy overall.

Finance Minister Shunichi Suzuki also weighed in during the same parliamentary session, reiterating his view that excessive and disorderly swings in the currency, which is hovering at a 20-year low, can be negative. Last week he characterized sudden changes as “very problematic” and said a weak yen could be bad for the economy, as the government firmed up its stance on the currency. 




Buying time for USD/JPY?

Although the BOJ’s announcement saw some relief on the Yen, we tend to think it may be very short lived. The last time USD/JPY broke past 125.750 was back in 1999. Where the pair sits now is the highest point in in two decades.

The next resistance for USD/JPY is 135.150. Rremember, the last time price was at this level was in 1999! Our play for the pair is to continue buying on the dips up to 135.000

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