Heightened Speculation of a BOJ Move Tomorrow did not Stop the Nikkei from Rallying or Yen from Slipping

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Marc Chandler
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Overview: The US dollar is trading with a mostly softer bias against the G10 currencies. The notable exceptions are the Japanese yen and Swiss franc. Ironically, speculation of a Bank of Japan rate hike appears to have increased, while there is a risk that the Swiss National Bank cuts rates this week. The Norwegian krone is the strongest of the major currencies. The central bank meets later this week but is widely expected to stand pat. The continued rise in oil prices may be buoying it. Most emerging market currencies are softer.

The MSCI Asia Pacific Index snapped a seven-week advance last week but rebounded today. The Nikkei rallied nearly 2.2%, its biggest rally in a month. Better industrial production data from China may have helped the CSI 300 rally nearly 1%. Taiwan's Taiex also rose 1%. Europe's Stoxx 600 is little changed after falling for the last two sessions. The US index futures point to a stronger open after faltering at the end of last week. The 10-year US Treasury yield is virtually unchanged at 4.30%, while European benchmark yields are mostly slightly firmer in quiet turnover. Gold slipped to a seven-day low near $2146 but has recovered to return to $2156. Nearby resistance is seen near $2158 and intraday momentum indicators are stretched. After rallying nearly 4% last week, May WTI is extend its advance today. It has reached nearly $81.55, its highest level since last October. Chart resistance is seen in the $82-$84 area. 

Asia Pacific

This week's Bank of Japan meeting is live in a way it has not been for years. A decision will be announced the first thing tomorrow. There have been several local press reports saying that the BOJ will in fact hike rates tomorrow and some bank economists have changed their calls to tomorrow from April. Despite the uncertainty, a few things seem clearer. First, lifting the target rate from below zero is not the start of an extended normalization process. The swaps market sees the year-end target rate around 0.25%. The effective rate is currently less than -0.01%. The two-year note rose to around 0.20% from zero in mid-January and settled slightly below there last week. Second, the prospect of a rate hike in Japan has not deterred Japanese investors from buying foreign bonds. They have bought slightly more than JPY2 trillion (~$13.5 bln) of foreign bonds as the speculation of a BOJ hike has increased over the past two weeks. Third, the upward revision to Q4 capex meant that the world's third-largest economy grew slightly in Q4 23 rather than contract slightly. However, the economy appears to be contracting here in Q1. Fourth, Prime Minister Kishida and his cabinet continue to see weak public support. Talk now is a national election could follow the LDP leadership contest late this year. 

Like the eurozone, the Chinese economy appears to be stabilizing. The February data popped, led by a 7% year-to-date, year-over-year rise in industrial output, compared with the median forecast of 5.2% in Bloomberg's survey    Meanwhile, retail sales continues to rise much quicker than investment (fixed assets, excluding rural areas). Retail sales rose 5.5%, slightly slower than anticipated while capex rose 4.2% (3.2% expected). Separately, to argue that Beijing does not allow access to US platforms such as Google, Facebook, Instagram, and X and therefore in the name of reciprocity, the US will block access to Chinese platforms is one thing, though few seem to understand that TikTok is banned in China. Instead, the US wraps itself in an ever-expanding cloak of national security, and the former Treasury Secretary who first sought to ban TikTok is now reportedly leading a team of investors seeking to buy TikTok. The US House of Representatives, in what may be a rare example of bipartisanship during the election year, passed the bill handily 352-65 in the middle of last week. Beijing could block the sale, but it is not clear that the US Senate is prepared to approve the measure. 

The outcome of Reserve Bank of Australia will be known early Tuesday in Australia. That said, there is practically no chance of a change. The futures market has an 80% chance of a cut in June and the first cut is not fully discounted until September. For the entire year, the market has one cut priced in and around an 85% chance of a second cut. Australia reports the February employment data on Thursday. Poor jobs growth will likely weigh on the exchange rate. Australia loss 67k full-time positions over the past six months. The unemployment rate bottomed at 3.4% in 2022 and was at 3.5% as recently as June 2023. It rose to 4.1% in January.

Rising US rates trumped speculation about the end of the Bank of Japan's negative-interest-rate policy. Last week, the dollar rose around 1.35% against the Japanese yen, its biggest weekly gain since mid-January. It stalled ahead of the weekend near JPY149.20, the (61.8%) retracement of the decline from the February 28 high near JPY150.85. It reached almost JPY149.35 today in Asia Pacific turnover and recorded the low there too near JPY148.90. Consolidation appears to be the most likely scenario in the hours ahead of the BOJ's announcement. The Australian dollar fell to six-day lows before the weekend. It approached $0.6550 to meet the (61.8%) retracement objective of the rally from the March 5 low near $0.6480. After the low was set, the Aussie encountered sellers a little above $0.6570 but rose to almost $0.6775 today. The 20- and 200-day moving averages converge around $0.6560. The dollar rose to a seven-day high against the Chinese yuan, slightly above CNY7.1980. The CNY7.20 cap remains intact, as it has since first being tested two months ago. The PBOC fixed the dollar at CNY7.0943 (CNY7.0975 on Friday) compared the average in the Bloomberg survey of CNY7.1993 (CNY7.2018 on Friday). Against the offshore yuan, the dollar also rose to a seven-day high near CNH7.2080. The high this quarter was in mid-February (~CNH7.2335).

Europe

Three G10 central banks in Europe meet this week and they all meet on Thursday. Norway's Norges Bank and the Bank of England are widely seen to be standing pat. We suspect that if there is a surprise could come from the third, the Swiss National Bank. The economy has slowed, and inflation is the envy of most other countries at 1.2% (EU harmonized measure) and a 1.1% core rate. A cut would also be defensive on ideas that it does not meet again until June 20, two weeks after the ECB meets and is not expected to cut its key rates. If it waits and cuts after the ECB, the risk of that the franc strengthens.

Kissinger once quipped, "Who do I call when I call Europe?"  Despite a European Commission, and European Central Bank, and a European Parliament there is still more than kernel of truth in the question. Given the numerous presidents and forums, it is difficult to know which is key. Now that Sunak has ruled out national elections with the local elections on May 2, the UK can set a date for the European Political Community, which includes the EU and a few other countries, including the UK and Turkey. Meanwhile, at the end of last week the Weimar Triangle (Germany, France, and Poland) met to discuss Ukraine and show a solid European front that seemed to be challenged recently by Macron's reluctance to rule out French troops in Ukraine (in what seemed like a bid to preserve strategic ambiguity). An agreement was reached for Germany and France to begin producing weapons in Ukraine. 

The euro was confined to about a quarter-of-a-cent below $1.09 before the weekend. It is in a slightly tighter range so far today. The euro's first weekly pullback in three weeks met the (38.2%) retracement of its rally from mid-February low slightly below $1.07. It was confined to a little more than a 15-tick range in North America last Friday. It is within that range today and is knocking on $1.09 in the European morning. A move above there may find fresh offers in the $1.0910-20 area. Sterling was also confined in a narrow range at the end of last week, in a little more than a third-of-a-cent range above $1.2725. That was a six-day low for sterling too, and it was set in dull early afternoon dealings in North America. The $1.2725 level held today but sterling is struggling ahead of $1.2750, and the intraday momentum indicators have turned lower. Support near $1.2700 could be tested in North America. 

America

This week's FOMC meeting illustrates a profound shift that has taken place under the Chair Powell's watch. The dot plot has been elevated from a simple calculation of the different officials' individual views that was not emphasized by Bernanke or Yellen to a powerful communication tool. In fact, with the acceptance that there will be not policy change, the focus is almost exclusively on the dot plot. In particular, the issue is whether the median dot changes from December when three cuts were thought to be appropriate. It seems strange to hear the press and other observers talk about a 0.1% miss on CPI and PPI to be called "hotter" but that reflects current sentiment. For the first time since last October, the Fed funds futures are no pricing in at least three rate cuts this year. We are concerned that the pendulum of market sentiment swings too far in both directions. Pricing in almost 170 bp of cuts this year, as the market did in mid-January was too much. We do not think that the data has deviated much from what Fed officials expected and therefore do not expect the median Fed forecast of 75 bp of cuts this year to change. It seems clear that the labor market is gradually slowing. The median dot in December was for the unemployment rate to be at 4.1% at the end of this year. With a 3.9% rate in February, the median dot looks low. February retail sales were weaker than expected and have fallen so far here in Q1. Retail sales account for around half of personal consumption.

This week's Canadian data is likely to tell a similar story as we saw in the US last week. Inflation is sticky while demand is softening. Canada reports February CPI tomorrow. The headline rate may rise back above 3% from 2.9% in January. The underlying core measures look unchanged, while January retail sales likely gave back around half of December's 0.9%, and even more when autos are excluded. There are three Latam central banks that meet this week. Brazil and Colombia are likely to continue their easing cycles with another half-point cut. Mexico is a closer call, and the swaps market looks split, which warns of the risk of sharp price action regardless of Thursday's decision. We look for the first rate cut, a quarter-point move, to be delivered.

The US dollar reached a new seven-day high against the Canadian dollar before the weekend slightly above CAD1.3550. It settled firmly as the risk-off move associated with the second consecutive weekly decline in the Nasdaq (first back-to-back weekly loss since October). Friday's high has held so far today. A move above it signals a retest on the CAD1.3600 that provided a cap in late February and earlier this month. The greenback would need to break below CAD1.3460, last week's low, to be of technical importance. The US dollar consolidated in its trough against the Mexican peso. It set the low for the year last Thursday near MXN16.6470. It has not risen above MXN16.74 since then and tested it earlier today. The dollar has not closed above its five-day moving average this month, though it has been frayed on an intraday basis. It comes in now near MXN16.7190. Perhaps, a settlement above it would be among the first signs of the steep downtrend losing momentum. The dollar fell last week for the third consecutive week and the sixth week of the past seven. Meanwhile, note in another fissure in the BRICS, Brazil has official launched anti-dumping investigations against China, focusing on industrial goods, including metal sheets, pre-painted steel, chemicals, and tires. Last year, Brazil had a $51 bln trade surplus with China.