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USD/JPY sticks to BoJ-inspired strong gains

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STRATEGY LONG

The Japanese yen depreciated past 134.5 per dollar, sliding back toward its weakest levels in seven weeks as the Bank of Japan maintained its ultra-easy monetary policy and made no adjustments to its yield curve control. However, the BOJ said it will remove forward guidance that pledges to keep interest rates at current or low levels. Latest data showed that core consumer prices in Japan’s capital, Tokyo, accelerated and exceeded forecasts in April, keeping the pressure on the central bank to adjust its current monetary settings. Externally, firm expectations that the US Federal Reserve will raise interest rates again in May continued to weigh on the yen, though recession fears and renewed concerns about the banking sector in the US limited the currency’s decline.

The USD/JPY pair builds on its strong intraday rally and climbs to its highest level since March 10, around the 136.40 region during the early North American session. Spot prices, however, retreat a few pips following the release of the US macro data and trade around the 136.00 mark, still up over 1.5% for the day.

This, along with a sharp intraday decline in the US Treasury bond yields, keeps a lid on any further gains for the Greenback. Apart from this, the risk-off impulse - as depicted by a generally weaker tone around the equity markets - lends some support to the safe-haven JPY and acts as a headwind for the USD/JPY pair amid slightly overbought oscillators on hourly charts. Nevertheless, spot prices remain on track to register strong gains for the third successive week, also marking the fifth week of a positive move in the previous six.

BULLISH FACTS
When the dust settles, the Fed is set to continue raising rates
US to have permanently higher rates than elsewhere
Re-acceleration of inflation and its win over the Fed will continue to catch the market by surprise
The Dollar is higher for longer, alongside the Fed’s narrative
Stagflation to take USD even higher
Hot CPI means the Fed pivot is well beyond the horizon
Ugly inflation promises further flight to safety
US at war means a stronger dollar
Outlook for Fed monetary policy now more hawkish
Powell projects pain, higher rates for longer set to keep the dollar bid
There is no alternative to the US dollar
No recession for America's labor market, more dollar gains eyed
Fed Chair Powell prioritizes fighting inflation, and ready to see negative growth

BEARISH FACTS
US Dollar's position as the primary global reserve currency is being challenged
America on verge of losing petrodollar privilege
Other regions may need to continue their crusade for inflation, reducing spreads of debt securities yields
Combination of lower Fed rate expectations and improved risk sentiment is quintessentially negative
No more Fed hikes, potentially lethal to the US Dollar
US economy to slip into recession, Fed eventually cut rates quicker than peer institutions
Sticky inflation? What is sticky is the downtrend
Fed will start cutting interest rates quicker than foreign central banks
Backing the US disinflation process and lower US rates
Shock growth shows worker supply is rising, inflation to fall, USD to retreat
End to monetary tightening should bring the USD's gains to an end
Incremental news outside of the US growing more positive
Fed to end its tightening cycle and US economic trend to worsen

ノート

US Consumer Credit Beats Estimates

Total consumer credit in the US rose $26.51 billion in March of 2023, after an upwardly revised $15 billion increase in the previous month and well above market expectations of a $16.5 billion rise. On a seasonally adjusted annual basis, consumer credit went up by 6.6 percent in March after a 3.7 percent gain in the prior month. Revolving credit, like credit cards, was up 17.3 percent, compared to a 5.7 percent rise in the prior month. Nonrevolving credit, typically auto and student loans, increased by 3 percent, following a 3.1 percent gain in the prior month.

ノート

Week Ahead - May 8th

The upcoming week in the US will be dominated by news related to prices, including the inflation rate, producer prices, and export and import prices, as well as the Michigan consumer confidence CPI gauge. Additionally, CPI figures are scheduled to be released in China, Mexico, Brazil, India, and Russia. In the UK, the Q1 GDP growth data will be released, and investors will be closely monitoring the Bank of England's interest rate decision. Elsewhere, China is set to publish external trade data, and Australia will report on consumer and business confidence.

ノート

USD/JPY moved towards the 135 level as traders focused on rising Treasury yields.
U.S. Dollar Index lost momentum and pulled back below the 101.50 level as traders reacted to the better-than-expected Non Farm Payrolls report. The report showed that U.S. economy added 253,000 jobs in April, compared to analyst consensus of 180,000.

The nearest support level for the U.S. Dollar Index is located at 101.05. In case the U.S. Dollar Index declines below this level, it will move towards the support at 100.80. A successful test of this level will push the U.S. Dollar Index towards the next support at 100.50.

R1:101.50 – R2:102.00 – R3:102.30

S1:101.05 – S2:100.80 – S3:100.50

ノート

Treasury yields moved higher but did not provide enough support to the American currency.

ノート

USD/JPY moved towards the 135 level as traders focused on rising Treasury yields.

ノート

USD/JPY Weekly Forecast – US Dollar Continues to See Volatility Against Yen
The US dollar has gone back and forth during the trading week, as we see a lot of extreme volatility against the yen.
The US dollar has gone back and forth during the trading week, as we see a lot of extreme volatility against the yen.

ノート

The US Week Ahead
The US CPI Report will impact the EUR/USD on Wednesday. Following the US Jobs Report, a hotter-than-expected US CPI Report would refuel bets on a June Fed interest rate hike.

On Thursday, wholesale inflation and jobless claims figures will also draw interest before consumer sentiment numbers on Friday.

Investors should track FOMC member reactions to the US Jobs Report and the incoming US CPI Report.

According to the CME FedWatch Tool, the probability of a 25-basis point June interest rate hike rose from 0.0% to 8.5%. On Friday, the US Jobs Report drove the modest rise. However, the US Jobs Report wiped out bets on a June Fed interest rate cut.

ノート

Fed says banking sector looks set to weather recent turmoil
"The Federal Reserve is prepared to address any liquidity pressures that may arise and is committed to ensuring that the U.S. banking system continues to perform its vital roles," the Fed said.

While the central bank noted there were spillover concerns following the failures of Santa Clara, California-based SVB and New York-based Signature, it maintained that the issues that sank those regional banks do not appear broadly across the banking sector, calling them "outliers" in terms of heavy reliance on uninsured deposits.

Those firms, as well as First Republic Bank, which was closed by regulators earlier this month and sold to JP Morgan Chase, also were grappling with large amounts of unrealized losses spurred by rapidly rising interest rates. Depositors fled SVB within days after it appeared the firm was in trouble, precipitating its abrupt closure.

The Fed noted in its report on Monday that more than 45% of bank assets reprice or mature within a year, suggesting there is not heavy exposure to less valuable securities for long periods of time. But while the amount of uninsured deposits at banks is declining, they still remain above historical averages after an influx of deposits spurred by the COVID-19 pandemic. In aggregate, it said banks remain well-capitalized.

DEBT LIMIT CONCERNS
The Fed released the report shortly after a separate central bank survey found banks were tightening credit standards amid weaker loan demand.

Beyond banks, the Fed said pressures on various market sectors remained within historical norms. However, it noted that valuations on commercial real estate remain high, which suggests there could be a "sizable" correction in property values should telework trends remain strong. The Fed found that banks hold about 60% of commercial real estate loans, with two-thirds of those at smaller lenders with less than $100 billion in assets.

The Fed's report also found that nearly half of its respondents identified the U.S. debt limit as a salient risk, after not appearing as a top concern in the previous report in November. U.S. Treasury Secretary Janet Yellen said the limit could be reached in June, but Democrats and Republicans are still sparring over what conditions, if any, should be attached to an increase.

Banking sector stresses were identified as a risk by more than half of respondents, up from 12% in the November report.

ノート

USD/JPY trading flat as investors await US CPI report
BOJ Governor announces plan to end of yield curve control policy
Japan’s consumer spending drops unexpectedly, challenging post-COVID recovery

he upcoming report on the US consumer price index in April, which is expected to show a year-over-year rise of 5% and a month-over-month gain of 0.4%, will be closely scrutinized by investors for any clues on future Federal Reserve policy moves. According to the CME Group’s FedWatch tool, traders are currently pricing in only a 13.1% chance of another 25 basis-point rate hike next month.

BOJ to End Yield Curve Control Policy Once Inflation Targets are Met
Bank of Japan Governor Kazuo Ueda has announced that the central bank will end its yield curve control policy and shrink its balance sheet once inflation sustainably reaches its 2% target.

He stated that Japan’s economy is showing positive signs, with inflation expectations remaining high. However, he warned of uncertainties in the outlook. Under yield curve control, the BOJ sets a short-term interest rate target of -0.1% and caps the 10-year bond yield around zero.

The BOJ also announced a plan to review its past monetary policy moves and conduct workshops with private academics to analyze the benefits and side effects of past monetary policies.

Japan’s Consumer Spending Falls Unexpectedly
Japan’s consumer spending fell unexpectedly in March, marking the largest decline in a year. This is in contrast to twelve consecutive months of declining real wages and highlights the challenges facing Japan’s post-COVID recovery.

The data point to uncertainties surrounding the Bank of Japan’s policy outlook amid financial sector worries and slowing global growth, despite expectations of phasing out ultra-easy monetary settings.

Despite eased COVID-19 restrictions on domestic shoppers and international travelers, rising prices have limited Japan’s consumption-led recovery from the pandemic. The outlook for monetary policy normalization under the new BOJ Governor Kazuo Ueda depends on whether the trend of wage hikes in large firms spreads to smaller businesses.

ノート

Ueda leaves everything unchanged
“What he had to say was in no way positive for JPY, as he underlined that he would continue his predecessor’s ultra-expansionary monetary policy. The indicator of this is the yield curve control (YCC) which would probably be the first element to change in a possible exit scenario. However, Ueda rejected this kind of change. In other words: everything remains unchanged.”

“Tthe Yen is only likely to appreciate long-term if there is this early move away from current monetary policy. Otherwise, it will mean: If the BoJ waits for too long, the Yen might easily suffer despite increased (real) yields. Or inflation eases back below the BoJ’s target level (2%). At that point we would be back to square one, which means a move away from the ultra-expansionary monetary policy would be unlikely. Short, medium and long-term.”

“Anyone who has already read the IMF’s latest "World Economic Outlook" and who follows its view might come to the conclusion that after the current inflation shock has worn off real yields in the rest of the world will be back at low levels. Followers of that view might not be excessively JPY-pessimistic, as the real yield disadvantage of the Yen would be reasonably moderate in that case.”