Yen Slumps on Cautious BOJ

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Marc Chandler
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Overview:  The market took a dovish message away from the Bank of Japan and sent the dollar above JPY136, its best level since March 10 and spurred a sharp rally in JGBs. Japanese equities led the rally among the Asia Pacific markets. Europe has not been able to follow suit. It disappointed with Q1 GDP (0.1% rather than 0.2%). The Stoxx 600 is of about 0.3%, leaving it off about 1.3% this week, its first weekly loss since the middle of March. US equity futures are softer too. Bonds are ending the week on a soft note. European benchmark yields are 6-9 bp lower. The 10-year US Treasury is off five basis points to 3.47% and the 10-year JGB yield is off 7 bp to about 0.38%.

The dollar is higher against all the G10 currencies. The yen is the weakest, off around 1.5% followed by the Norwegian krone, down about 1.1%. The Swiss franc is the most resilient with less than a 0.2% decline. Among emerging market currencies, central and eastern European currencies are weakest. On the week, the JP Morgan Emerging Market Currency Index is flat. The rising dollar is offset the decline in yields to weigh on gold. It is pinned near the lower end of its recent range below $1980. June WTI is stabilized after falling to almost $74 in the middle of the week. It rose above yesterday's high to reach $75.50, where it was sold again.

Asia Pacific

Governor Ueda led the Bank of Japan to a more flexible stance, but the net take away has been a dovish slant. It did remove guidance about expecting interest rates to “remain at their present or lower levels" and dropped a dated reference to closely monitoring the impact from the pandemic. This was seen as mostly "housekeeping."  A "broad-perspective review" of monetary policy was announced, as many expected, but it may take up to 18 months to complete. Ueda warned that policy changes were possible while the review taking place. The BOJ nudged up its CPI forecast for this fiscal year to 1.8% from 1.6%, and next year's was raised to 2.0% from 1.8%. The following year, introduced for the first time, is at 1.6%. This drives home the point that inflation is not expected to sustain the 2% target. The GDP forecast was trimmed to 1.4% this year from1.7%, while next year's projection was revised to 1.2% from 1.1%. An in fiscal year 2023 growth is estimated to be 1%. 

Separately, Japan reported an unexpected jump in the March unemployment (2.8% vs. 2.6%), the highest since June 2021. The job-to-applicant ratio slipped to 1.32 from 1.34. March retail sales rose 0.6%, twice as much as the median in Bloomberg's survey projected after surging 2.1% in February (as government subsidies kicked in). Industrial production rose by 0.8%, also twice what economists expected. It follows February's 4.6% gain as it continued to recover from the 5.3% collapse in January (lunar new year related). Lastly, Tokyo's April CPI, a good indicator of the national figures that are not due for several weeks, was stronger than expected. The headline rate rose to 3.5% from 3.3%. The market expected to have been steady. The core rate (excluding fresh food) was also expected to be unchanged but instead rose to 3.5% from 3.2%. The problem lurks beyond the subsides for gas and electricity and the yen's appreciation on a trade-weighted basis. Excluding fresh food and energy, Tokyo's underlying CPI accelerated to a new cyclical high of 3.8% from 3.4%. The median forecast in Bloomberg's survey was for a 3.5% increase. The takeaway: While the labor market softened, consumption (retail sales) and output (industrial production) were stronger than expected and Tokyo's CPI warned of strengthening price pressures. 

The seemingly dovish BOJ and not the economic data, drove the dollar sharply higher. It is pushing above JPY136 in the European morning after fraying the 20-day moving average near JPY133.50 in last couple of sessions and earlier today. There is little chart resistance ahead of JPY137.00, which also is where the 200-day moving average is found. Initial support is around JPY135.50, and JPY135, which had been resistance is now important support. The Australian dollar is posting an outside down day, trading on both sides of yesterday's range. A close below yesterday's low (~$0.6595) is needed to confirm the bearish pattern. The low for the year was set on March 10 near $0.6565. It is testing $0.6580 in the European morning, and there are options for A$880 mln at $0.6550 that expire today. Below there, the charts do not see much support ahead of $0.6400. Despite the greenback's firmer tone, it made little headway against the Chinese yuan. It is trading inside yesterday's narrow range (~CNY6.9110-CNY6.9325). If it were a less managed currency, we would think the upside beckons, though the markets are closed Monday-Wednesday next week. The PBOC set the dollar's reference rate at CNY6.9240. The median projection in Bloomberg's survey was CNY6.9236.

Europe

The eurozone reported its preliminary estimate of Q1 GDP and three large members published their April inflation figures ahead of the aggregate figures due on May 2. The eurozone economy expanded by 0.1% in Q1 23 after contracted by 0.1% in Q4 22. This was slightly disappointing, largely due to Germany. The region's biggest economy was flat, and the market expected a small expansion (0.2%). France matched expectations by expanding by 0.2%. Italy surprised on the upside, reporting 0.5% growth in Q1 after a 0.1% contraction in Q4 22. The market expected 0.2%. reported a 0.2% growth. The Spanish economy also beat expectations, with 0.5% growth instead of 0.3% and Q4 22 was revised to show 0.4% growth rather than 0.2%. Details are available with the next iteration. The median forecast in Bloomberg's monthly survey sees year-over-year growth this year at 0.6% this year. The ECB puts it at 1.0%. The IMF splits the difference with a 0.8% forecast.

Typically, the eurozone's preliminary estimate of CPI is given at the very end of the month, but due to a calendar quirk, it will not be reported until May 2. Still, Germany, France, and Spain have reported their numbers today. German states have reported, and the national figure looks unchanged at 7.8% or possibly slightly lower on the EU harmonized measure. If so, on a monthly basis, Germany's CPI rose 0.8% after two months of 1.0%-1.1% increases. In the first four months of the year, German inflation has risen at an annualized rate of over 10%. France's April CPI rose 0.7% for a year-over-year pace of 6.9% after 6.7% in March. At an annualized pace, it rose a little less than 10% in the Jan-April period. Spain's CPI rose 0.5% this month, but because prices fell by 0.3% in April 2022 (after a 3.9% surge in March), the year-over-year rate accelerated to 3.8% from 3.1%, which is a little less than expected. Spain's inflation rose by about 6.3% at an annualized rate so far this year.

The euro is trading heavier, but it has held above the week's low set Tuesday near $1.0965, which is where the 20-day moving average is found today. It has not traded below its since mid-March and a break of it would provide more evidence that the upside momentum is fading. The euro settled yesterday near $1.1030 and a lower close today would be the third loss of the week. It is the most in any week since the end of February. If the 20-day moving average does break, the first target may be around $1.0875. Sterling is trading quieter. It briefly traded a little above yesterday's $1.2500 high but held below the week's high (~$1.2515). On the downside, it is holding above yesterday's low (~$1.2435). The week's low was slightly below $1.2390 and key support is seen by $1.2365. Many European centers are closed Monday.

America

The US Q1 GDP looked soft at 1.1% annualized. This was in line with the Atlanta's Fed's GDP tracker and the latest forecasts by economists are the recent batch of data and benchmark retail sales and inventory revisions. However, below the surface there is underlying resilience. Final sales to domestic private parties, which excludes inventories, trade, and government, rose by 2.9%. That is the largest gain since Q4 21. Inventories alone were a 2.26% drag on growth. Business investment slowed. This reflected a fall in equipment purchases and the weakest intellectual property expenditures in almost three years. Consumption was strong, rising 3.7% at annualized pace. The strongest quarter last year was a 2.3% rise in Q3. The deflators were also on the strong side. The overall deflator was up 4.0% from 3.9%. Economists (median in Bloomberg's survey) expected slippage to 3.7%. The core PCE deflator accelerated at 4.9% from 4.4%, the strongest gain since Q1 22.

Yesterday's data, which included the first decline in weekly jobless claims in three weeks, boosted the market's confidence of a quarter-point rate hike by the Fed next week. The Fed funds futures imply almost a 90% confidence. That hike would bring the upper end of the target rate to 5.25%. The Fed funds futures strip implies a year-end effective rate of 4.50%. That continues to seem improbable at best. In fact, another rate hike after next week's move seems more likely to us than the three quarter-point cuts that are discounted at the Fed's last five meetings of the year. 

March's personal income and consumption data are already in yesterday's GDP figures. The deflators may draw some attention but are really old news. The headline rate likely slowed to 4.1%-4.2% from 5.0% in February. Making some conservative assumptions, it can fall another percentage point in Q2. However, then it will become more difficult for substantial improvement in H2. As with the CPI, the core PCE deflator is likely to be above the headline rate. Some see this as a late cycle indicator. But there is also something more troubling about it. The reason that the core measure is watched so closely is not because food and energy are volatile. Nor is it because food and energy are often driven by supply rather than demand. These are among the explanations frequently touted by the popular press. The reason is that over time, the headline rate converges to the core rate, not the other way around. The core is the signal. The fact that is above the headline rate is disconcerting.

Canada reports February GDP figures. After expanding by 0.5% in January, activity is expected to have expanded by 0.2% in February. Bloomberg's latest monthly survey found a median forecast for Q1 GDP of 1.6% annualized which assumes a weak March. The median looks for the economy to stagnate here in Q2 before contracting in Q3. The median view was no change in the policy rate (4.5%) before the end of the year, while the swaps market almost an 80% chance of a cut. Mexico surprised yesterday with a $1.17 bln March trade surplus, with record exports. Economists (median in Bloomberg's survey) anticipated a $900 mln deficit. Exports are up 3.2% from a year ago, and imports rose 1.1%. Today, Mexico reports Q1 GDP. The median forecast is for 0.8% quarter-over-quarter growth after 0.5% in Q4 22. Last year, the average quarterly expansion was 0.9%. Economists in Bloomberg's monthly survey sees the Mexican economy growing by 1.5% this year, half of last year's pace. The IMF is a little more optimistic at 1.8%.

After nesting for the past two sessions, the US dollar is taking another leg higher against the Canadian dollar today. It approached CAD1.3670, a new high for the month. With today's advance, the greenback has surpassed the (61.8%) retracement of the slide from the March 10 high (~CAD1.3860) that had capped it in recent days (~CAD1.3650). There is little on the charts before CAD1.3700-30. That said, the intraday momentum indicators are over bought. Initial support will likely be found in the CAD1.3440-50 area. The US dollar reversed lower against the Mexican peso yesterday. After making a new two-week high (~MXN18.1970), the dollar was sold a little through MXN18.02. The greenback has steadied today with firmer bias that saw it rise to almost MXN18.11. While the peso continues to be resilient, it may snap a three-month gain. Last month, the US dollar settled near MXN18.0460.