USD: Gets A Reprieve

In Tokyo morning trade, JGB futures are slightly stronger, +6 compared to settlement levels.

• With the domestic calendar empty ahead of tomorrow's holiday and Thursday's BoJ Policy Decision, the local market is on headlines and US tsys watch.
• (MNI) The Bank of Japan board is expected to keep its 0.5% policy interest rate unchanged at the two-day meeting ending May 1, as policymakers monitor the economic and inflationary impact of recent U.S. trade policies and volatile markets.
• Bank economists will also assess the potential downside risks to the economy and how they might affect inflation, using the most recent data available ahead of the meeting. This analysis will help shape the most likely economic scenario and inform the quarterly Outlook Report forecasts published alongside the rate decision.
• Cash US tsys are 1-2bps cheaper, with a flattening bias, in today’s Asia-Pac session after Friday’s solid gains.
• Cash JGBs are flat to 1bp richer out to the 30-year across benchmarks and ~1bp cheaper beyond. The benchmark 10-year yield is 1.1bps lower at 1.331% versus the cycle high of 1.596%.
• Swap rates are little changed. Swap spreads are mixed.

SELL 3020 of TYM5 traded at 111-19+, post-time 01:36:55 BST (DV01 $193,162). The contract is currently trading at 111-18+, 0-02+ from closing levels.

Goldman Sachs: "JPY: Protection selection. Being long the Japanese Yen versus the Dollar—or short USD/JPY—tends to be one of the most effective FX hedges against recession fears. But price action over the past month exhibits both its benefits and limits as a risk hedge. USD/JPY did generally move lower across recent key periods, though it “failed to work” in late March around the auto tariffs announcement. A backdrop of higher yields tends to be the one case in which USD/JPY moves higher even alongside lower equities, as was the case last month. But the regime of shifting correlations since then and the perception of greater institutional risks leaves rates a less obvious headwind, at least until those concerns relax. We also continue to think that any dovish shift from the BoJ next week would not be a barrier to Yen strength. Our view that the Dollar should unwind its overvaluation of recent years—with high probability that it flips to undervalued on a broad basis—means that USD/JPY should be an effective hedge over time. We see USD/JPY falling to 135 over the next 12 months, with risks skewed towards getting to (and below) that level much earlier. But given that equities still look vulnerable to nearer-term downside and the speed of the Dollar sell-off leaves it susceptible to shorter-term swings, we prefer to be short AUD/JPY tactically. The main risk to this expression is that policy continues to shift in a market-friendly direction, or that the hard data remain resilient in the upcoming key data releases. Though while front-loading ahead of tariffs may mask any weakness in activity, we expect markets to continue to discount better data over the very near term."