JPY: Yen Woes Continue
Participants continued to shed the yen Wednesday, which sent USD/JPY to new cycle highs. The pair's RSI moved even deeper into overbought territory as a long-term downtrend drawn off the 2002 high came under pressure. USD/JPY managed to eke out some gains even as U.S. Tsy yields faltered after Asia hours.
- On that front, note that our policy team recently flagged its understanding that “the Bank of Japan is increasingly uncomfortable with the weakening yen, but its options for addressing the depreciation of the currency are narrowing as downside risks to the economy grow, leaving it to rely on verbal intervention in concert with the Ministry of Finance” (click for full story).
- USD/JPY last sits at Y121.11, just shy of neutral levels. A break above trendline resistance/yesterday's high at Y121.21/41 would bring Jan 29, 2016 high of Y121.69 into view. Bears look for a pullback below the Y120.00 round figure.
- Expansion in Japan's manufacturing sector accelerated in March, while contraction in services moderated a tad, according to the preliminary results of Jibun Bank survey.
- Focus turns to Tokyo CPI, due for release tomorrow. In addition, the usual dovish dissenter among BoJ policymakers Kataoka will speak later today.
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AUSSIE BONDS: Moving Away From Highs
The post-holiday impulse from U.S. Tsys hasn’t spilled over into the ACGB space, with Aussie bonds edging further away from their early Sydney peaks, leaving YM +2.5 & XM +3.0 at typing. The longer end of the cash ACGB curve has outperformed at the margin, richening by ~3.5bp as of typing. There isn’t much in the way of overt drivers to facilitate the underperformance, perhaps some have pulled out of their tightener positions in the Australia/U.S. 10-Year yield spread, which has moved above the 30bp mark for the first time since early Nov. Note that recent history has seen relatively wide interest in fading moves above the 30bp mark in this spread, although the current level of geopolitical angst and uptick in market volatility measures may be dissuading some from implementing Australia/U.S. tighteners.
US TSYS: 10s Lead The Rally after Long U.S. Weekend
Cash Tsys play catch up after the elongated weekend in the U.S., with the major benchmarks richening by 3.0-8.5bp as of typing, as the 10-Year point leads on the curve. TYH2 last deals +0-18+ at +127-08, 0-01 off of best levels, with a modest bid coming into futures on the cash re-open. Headline flow remains Ukraine-centric, with little else of note for investors to digest.
BOJ: VIEW: SocGen On The Outlook For MonPol
Societe Generale note that “it goes without saying that Japan's long-term interest rates have been above 0.2% in tandem with the rise in U.S. long-term interest rates, but two other uncertainties are also driving the rise. First, there is the concern that the Bank of Japan will take steps to increase the volatility of long-term interest rates, triggered by the emergence of "adverse JPY depreciation," with core CPI reaching 2% Y/Y even before Governor Kuroda steps down. Second, there is the concern that the BoJ may decide to raise interest rates if either Deputy Governor Amamiya or former Deputy Governor Nakaso, take over as Governor after Kuroda's retirement in April 2023.”
- “However, last week's "limit price operation" showed that the BoJ will not tolerate a rise in interest rates while considering a JPY depreciation. In addition, the view that "adverse JPY depreciation" will eventually be realised is likely to be overstated. Moreover, a sharp depreciation of the JPY in a short period of time and higher prices than currently expected will be needed, in order to lead to strong criticism of the BoJ's non-normalised monetary policy, which would be unlike that of other central banks. However, not only is the link between the U.S.-Japan interest rate differential and the USD/JPY rate now declining, but we also believe that Japanese core CPI will not reach 2% Y/Y in April or beyond. Finally, Amamiya and Nakaso are seen as more hawkish than Kuroda, but given that the annual change of core CPI is likely to drop sharply next year, it will take time for the new Governor to raise interest rates, even if he is able to make minor adjustments to current monetary policy. We expect that the BoJ will maintain the current monetary policy until next April and will not raise interest rates immediately thereafter.”
