Is BOJ Ready For Another Intervention?

This was evident over the weekend as the G20 meeting in Kyoto, Japan, noted the need for stable rates of currency and at the same time, alerted against an increased currency volatility that would be damaging most of the global economies.

Bank of Japan (BoJ) President Kanda as well Finance Minister Shunichi Suzuki stated that FX intervention must be done sparingly and in a coordinated way with international partners. Suzuki, the Finance Minister of Japan, validated the views of Shunichi, supporting that there has been a constant flow of views between the BoJ authorities regarding this issue and the rest of the global financial authorities.

Both have also given a speech to FX market concerns. Finance Minister Suzuki joined in the crusade during the weekend, warning FX investors he was watching currency moves very closely and would act against extremes.

This was reiterated during a press conference by other members earlier this morning, who are also concerned about a weak JPY, noting that big moves in FX were unwarranted given economic fundamentals.

They’ve added that the MoF would be fully using any measures leaning on it to oversee FX markets. The rhetoric from Shunichi and Suzuki is now at level 6 on my 7-level verbal intervention scale. That suggests a physical intervention is extremely close. USD/JPY has not been able to build on the late gains seen on Monday, with the BoJ potentially being able to intervene on using the lack of liquidity today due to the US and UK holidays as an excuse. So far, no intervention has been seen.

USD/JPY remains bearish as yield differentials between the US and Japan very slowly narrow, both at the short and long end. US inflation data released last Friday was softer than expected, pushing US Treasury yields lower. 

BoJ President and Vice President yesterday both made it clear that after the first interest rate hike since the financial crisis in the fourth quarter, the BoJ is ready to hike interest rates further this year. This helped to push Japanese bond yields higher on the day. There was no revision to my FX model yesterday on account of a London holiday, but on Friday, it had suggested to me that USD/JPY had got significantly overbought on short-term trading. The model imposes a short-run fair value estimate of 152.68. Had the model not been prevented by the London holiday, it would have recommended a short position in USD/JPY.

AUD: INFLATION AND MARKET EXPECTATIONS

Retail sales data for Australia slightly missed expectations, showing a 0.2% month-over-month increase in April compared with the consensus forecast for a 0.3% increase. Meanwhile, the data was distorted by Easter and the school holidays all occurring earlier this year. Consequently, this retail sales data was of no help for RBA interest rate markets, or the AUD. Attention now turns to today’s release of the UK’s April CPI data, which should be taking the shine off the GBP.

Upside risks are in play due to the higher energy prices, but balancing acts from the discounts in retail stores and lower food prices are expected to take the sting out of this surge in inflation.

Crucially, BoE Governor Bailey has signalled the Board will look through the transient effects of higher energy prices on inflation. Of course, this would imply a more potent increase in inflation, excluding energy costs, being necessary before the central bank even thinks about tightening monetary policy.

Key sources of inflation pressures are through service prices, where a great deal of focus will be on rents, household utilities, and insurance—interestingly, all of these carry a lower weight for the first month of the quarter in the CPI basket. The UK OIS is now flat and shows that there is a small chance of seeing a rate cut at the BoE’s June meeting, but by September, a small hike is priced. This therefore leaves a two-way risk around Wednesday’s inflation data for the AUD at the very least.

Market analysis from Luca Santos, market analyst at ACY Securities

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