Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Japanese Yen is throwing a warning
Charu Chanana
Chief Investment Strategist
Summary: Yen’s slide to fresh YTD lows is a reminder of how market has potentially overpriced a hawkish Bank of Japan outcome. Comments from Deputy Governor Uchida brought the focus back to BOJ’s limits to tighten policy, and why JPY could remain a key funder in carry trades amid low volatility environments. Geopolitics and higher oil prices could also weigh on JPY, although we are in intervention-threat zone that could mean a reversal, but not a recovery.
It’s been a rather quiet week in FX markets after some early dollar strength subsided with much of the Fed pushback to easing expectations priced in. But when volatility is low, carry runs high. This could have made CHF and JPY as the underperformers for this week so far, but there were some other factors that underpinned those moves as well.
USDJPY rallied back to mid-149 levels after BoJ Deputy Governor Shinichi Uchida said yesterday that termination of the negative interest rate policy in Japan would likely be one-off, instead of the start of an aggressive rate hiking cycle. He said that overall accommodative conditions will be maintained and any actions post-NIRP exit would occur at a "gradual pace". This is something we argued earlier, and continues to suggest that any BOJ tightening will be gradual and modest.
However, yen’s overreaction is a warning sign that market may still be expecting a steeper tightening from the BOJ and may be disappointed later. This is clearly from a positioning standpoint, with yen shorts having been covering significantly since the peak in November 2023. Certainly, yen’s weakness yesterday could also have been amplified by the move higher in Treasury yields, but we continue to believe that yen will remain a key funding currency for carry trades in low volatility environments despite BOJ tightening expectations.
Our technical strategist says that the break of 148.80 resistance in USDJPY could open the doors to 152, but intervention risks are likely to come in the way above 150. This means it may be better to look at yen crosses, where AUDJPY and EURJPY remain quite interesting, but CADJPY may be in focus as well going into the weekend amid gains in oil prices and Brent crude rising above $80/barrel on lack of progress on Israel-Hamas ceasefire.
The Canadian dollar (CAD) benefits from higher oil prices as Canada is a key oil exporter, while Japan being a key energy importer means JPY suffers. CADJPY is knocking at 111 level and Sept high was at 111.17. If broken, this could open the door to 115. Canada’s January employment data is out today and expected to come in stronger at 15k vs. 0.1k in December which may mean Bank of Canada could have room to avoid an immediate pivot.
NZDJPY also in focus after a major bank said that RBNZ could hike twice more. This made AUDNZD break lower to the 1.06 handle. NZDJPY surged to its highest levels since 2014, nearing 91.50, and a break above will bring 94 in focus.
US CPI revisions will also be key to watch today. Any downside revisions may have limited market impact, given Powell is looking for “more” good data, not necessarily “better” data. But upward revisions would add to the pushback message and bring gains in the USD, while impacting JPY, EUR and gold negatively.
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Other recent Macro/FX articles:
9 Feb: Global Market Quick Take - Asia
9 Feb: FX 101: USD Smile and portfolio impacts from King Dollar
5 Feb: Weekly FX Chartbook: More and more reasons to stay long US dollar
1 Feb: FOMC out, BOE and NFP next – will the hawkish waves continue?
30 Jan: USD remains a tough sell even with a dovish Fed outcome
29 Jan: Weekly FX Chartbook: Earnings and geopolitics to take the focus away from Powell
25 Jan: US PCE Preview: March rate cut bets could pick up again
24 Jan: Markets could start to price in a Trump presidency
24 Jan: ECB Preview: Will EUR pay heed to the pushback to April cut expectations?
23 Jan: Podcast: Central banks and key figures run the show
22 Jan: Video: The Curious Investor - Q1 2024 FX and Commodities Outlook
22 Jan: Weekly FX Chartbook: Soft-landing hopes and US exceptionalism will remain at play
19 Jan: A reality check on Bank of Japan’s policy normalization and JPY appreciation expectations
15 Jan: Weekly FX Chartbook: UK data will be a test of GBP resilience
12 Jan: Markets ignore CPI uptick, Mideast tensions could fuel haven and oil-related FX
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9 Jan: US CPI Preview: Markets could be sensitive to an upside surprise
8 Jan: Macro and FX Podcast: Upcoming US CPI figures, USD momentum, and musings on China
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