Heightened Threat of Japanese Intervention Pushes Greenback Away from JPY152

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Marc Chandler
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Overview: The dollar neared JPY152, setting a new 34-year high. This appeared to spur a senior official meeting in Tokyo, ostensibly to talk about the response. Previously, we suggested that Friday, when most markets outside of Asia will be closed, could provide an interesting opportunity for intervention. The implicit threat was enough to take the dollar to JPY151.10 in the European morning. Most of the G10 currencies are softer against the dollar but the yen. A dovish Riksbank had negligible impact on the Swedish krona. It could be the second G10 central bank to cut rates, following last week's Swiss decision. It may move in May. Most emerging market currencies are softer today. The South African rand is the strongest, up by about 0.3% before the central bank announcement, which is expected to standpat at 8.25%. The Mexican peso is trading at new highs for the year. We suspect the Chinese yuan would trade higher on the back of any BOJ intervention.

Chinese equities got thumped today, with the CSI 300 off nearly 1.2% and the Hang Seng dropped almost 1.4%. China efforts to seek WTO action against the US EV subsidies seems rich and Beijing's track record at the WTO is weak. Of the 16 claims it has brought against the US, it has won 5 and lost 1. There have been three split decisions, and seven claims are still pending. The US has had more success. Some cases are still pending, but it has challenged China 27 times since 2002 and won all the cases that have been decided. Europe's Stoxx 600 is slightly softer after two days of gains. US index futures are trading firmly. European 10-year yields are most 1-2 bp lower, and the 10-year US Treasury yield is flat near 4.24%. Gold is firm, recording a higher low for the third consecutive session as remains near $2200. May WTI is slightly softer after being turned back from above $82 yesterday and a strong build was reported by API. 

Asia Pacific

As is often the case this time of year, analysts and the press recycle stories about the seasonality of the yen as the fiscal year end is approached. Yet repetition does not make it so. Consider that actual performance over the last 20 years. The yen has risen in 11 of the last 20 years in March and fallen the other nine. The Ministry of Finance reports the weekly portfolio flows tomorrow. Japanese investors sold JPY800 bln of foreign bonds in the week through March 15 after buying more than JPY2 trillion in the previous two weeks. The weekly report shows that Japanese investors bought nearly JPY4.8 trillion of foreign bonds in March 2023. Tomorrow's data will cover last week when the BOJ hiked rates and apparently leaked it ahead of time to the local media. Japanese investors sold about JPY1.17 trillion of foreign equities in the two weeks through March 15. They were small buyers last March.

Foreign investors have been consistently buying Japanese equities this year. The JPY1.46 trillion of sales in the week ending March 15 was only the second of net sales this year and is the most since last September. If there is a seasonal pattern, it is the foreigners typically are large sellers of Japanese equities for a week in March and September. But the impact on the Topix and Nikkei seem minor. The Topix has risen in 12 years and the Nikkei has risen in 11 of the past 20 years in March. Foreign investors have been large buyers of Japanese bonds in recent weeks. The nearly JPY2.2 trillion JGBs bought in the week ending March 15 was the most since the middle of March 2023. Foreign investors bought almost JPY1.2 trillion JGBs the previous week.

Australia's monthly CPI gauge unchanged February at 3.4% for the third consecutive month. Most economists in Bloomberg survey expected a small increase. Last February, Australia's CPI was at 6.8%. The futures market has about a 34% chance of a rate cut discounted for June. This is near the least of the year. A June cut weas last fully discounted in early February. The market does not have the first cut completely priced in until September and does not have two cuts totally priced in for the year. At the end of last year, the futures market had two cuts and about a little more than a 70% chance of a third cut discounted.

Without clear directional cues from US interest rates and stepped-up verbal warning from Japanese officials, the market has been happy to job the dollar mostly between JPY151.20 and JPY151.60. The dollar edged up a bit closer to JPY152 but was again greeted with an escalation of official rhetoric. In recent sessions, the 24-hour dollar high has been recorded in North America, where material intervention seems the least likely. We have suggested a possible scenario for material intervention on Friday in Tokyo, with most European and US markets closed for the Easter holiday. The Australian dollar was turned lower from almost $0.6560, the (38.2%) retracement of the sharp decline from last Thursday and Friday. It held $0.6530 on the pullback in North America but the price action was poor. The Australian dollar recorded a low near $0.6510. There are a little more than A$2.1 bln of options that expire today between $0.6500 and $0.6510 (about 60% at the higher strike). With the dollar firm and the yen weak, it is little wonder that the Chinese yuan was sold. The PBOC set the dollar's reference rate slightly higher, seeming to defy market talk that officials are anxious. The fix was set at CNY7.0946 (CNY7.0943 yesterday). The average projection in Bloomberg's survey was CNY7.2222 (CNY7.2019 yesterday). The dollar approached but held below Monday's high slightly below CNY7.23. The 2% band around the fix gives a range of CNY6.9527 to CNY7.2365. Against the offshore yuan, the greenback has remained above the onshore band (CNH7.2464-CNH7.2584) and this may be the source of stress and leaves the offshore market vulnerable to an officially inspired squeeze. We suspect that if the BOJ were to intervene, the yuan would likely be a beneficiary. 

Europe

Some observers may point to the small improvement in the EC's consumer confidence survey to -14.9, its best reading since March 2022. It is a diffusion indicator reflecting the percent balance. It was launched in 1985, nearly 40 years ago, and it has not been positive once. Over its history, it has averaged -10.5. The record low was not set during the Great Financial Crisis and Europe's sovereign debt crisis, but in August 2022, six-months after Russia's most recent invasion of Ukraine. The weighted comprehensive economic sentiment measure ticked up to 96.3 this month after slipping in both January and February. It finished last year at 96.4.

Sweden's Riksbank left rates on hold, as widely expected, but signaled a cut in Q2. The odds of a May cut have increased in recent weeks, even before the softer than expected February CPI report on March 14. The swaps market had discounted about a 1-in-4 chance of a May cut at the end of February. On the eve, of the CPI report, the odds had more than doubled and as of yesterday, the probability was slightly more than 60%. Today, it is near 80%. Its updated forward guidance sees the year end rate near 3.45% from 4.0% now and 4.10% in its previous forecast last November. The krona is practically flat against the dollar and euro.

The euro peaked yesterday near $1.0865 shortly before US trading began. It was sold down to $1.0825 as European banks were closing shop. It has taken the euro almost 24-hours to rise from $1.0825 to $1.0865 and it took seven hours to return. The euro met surpassed the (38.2%) retracement objective of last Thursday-Friday drop near $1.0855 but stopped short of the (50%) retracement slightly above $1.0870. The close was weak and the euro slipped a little closer to $1.0820 today. The same pattern was evident in sterling. It stalled shortly after retracing (38.2%) of the decline from the end of last week. It settled on a soft note near session lows and was sold to about $1.2610 today before finding a bid in Europe. Yesterday, it reached almost $1.2670 in the European morning before falling by nearly half-of-a-cent in North America.

America

The US economic calendar is light today. The main features include the sale of four-month bills, $28 bln two-year floating rate notes, and $43 bln seven-year notes. After the North American markets close, Fed Governor Waller speaks at the Economic Club in NY. This week's highlight still lies ahead:  Friday, while US markets are closed, the February personal income and consumption data and deflators are due, and a few hours later, Fed Chair Powell speaks at the San Francisco Federal Reserve's Macroeconomics and Monetary Policy Conference in a moderated conversation. The Atlanta Fed's GDP tracker was left unchanged at 2.1% for Q1 yesterday. It will be updated after the Friday's income and consumption data. The median forecast in Bloomberg's monthly survey is for 2.0% GDP, up from 1.8% last month. The median in the survey currently has the economy slowing to 1.4% in Q2.

Mexico reports its February trade balance today. Mexico's trade balance almost always improves in February from January (seventeen years in a row, and 18 of the past 20 years). This year is unlikely to be an exception. The median forecast in Bloomberg's survey is for a $1.63 bln shortfall after a $4.3 deficit in January. Mexico's exports have fallen for the three months through January and are off about 20% during this period. We already know that Mexico's vehicle exports rose by 11% in February after falling nearly 10% in January. February vehicle exports were up about 22.5% year-over-year. Imports rose by 2.8% in January but fell 14% in November-December 2023.

The US dollar slipped for its second consecutive session against the Canadian dollar. The setback, to CAD1.3555 met the (38.2%) retracement of the greenback's gains at the end of last week. After not trading above CAD1.3600 yesterday, the greenback poked above it in late Asia but is pulling back in the European morning. Still, it is likely to find support near CAD1.3580. The Mexican peso traded quieter but firmer. In a broadly consolidative foreign exchange market, one is paid to be long pesos. There are higher yields available, of course, but the peso's low volatility and liquidity makes it attractive. The dollar ground lower, reaching almost MXN16.64 in late North American turnover yesterday to set a marginal new eight-month low. Today it has leaked closer to MXN16.63. The seven-year low recorded last July near MXN16.6260 looks likely to give way. It is difficult to talk about support as the dollar approaches levels not seen in 2015 but the MXN16.25-MXN16.35 area looks reasonable. One market favorite, short Swiss francs against the peso is at seven-year lows--a 4.5% spot move this month plus the carry. Year-to-date the total return is slightly more than 10%.