BOJ Adds to an Already Eventful Week

April 29, 2024

Win Thin

BOJ intervention has added to an already eventful week; the U.S. growth outlook remains solid
Eurozone started reporting April CPI data; the ECB hawks continue to push back against a July cut; Sweden reported weak Q1 GDP
The BOJ finally intervened today

The Bank of Japan finally showed its hand. After USD/JPY traded at a new high near 160.15, it plunged to 154.55 on likely BOJ intervention (see below). DXY is trading lower near 105.6668 after trading above 106 the past two days. The euro is trading higher near $1.0715 while sterling is trading higher near $1.2530. Despite the BOJ intervention, monetary policy divergences continue to favor the dollar and so the rally should resume after this correction. This week’s FOMC meeting should see a hawkish hold. In addition, the ongoing backdrop of persistent inflation and robust growth in the U.S. should keep upward pressure on U.S. yields, which in turn would be supportive of the dollar. We believe that while market easing expectations have adjusted violently this month, there is still room to go. When the market finally capitulates on the Fed, the dollar should gain further.

AMERICAS

Bank of Japan intervention has added to an already eventful week. Not only does the FOMC meet, but the U.S. will also report key data for April that will help shape Fed expectations going forward. While the intervention has interrupted the dollar’s ascent, we do not think the impact will be long-lasting as monetary policy divergences continue to favor the dollar. Bottom line: we expect the double whammy of a hawkish Fed and strong U.S. data to continue pushing yields higher, thereby supporting further dollar gains.

Fed easing expectations have been pushed out. Odds of a June cut have fallen to around 10%, while July odds have fallen to 35% and September odds have fallen below 80%. A November cut is fully priced in, but the odds have fallen below 100% from time to time.

The U.S. growth outlook remains solid. The Atlanta Fed GDPNow model released its initial Q2 estimate at 3.9% SAAR and will be updated Wednesday after the data. These early reads are often revised significantly in both directions, but this estimate suggests momentum remains fairly strong. The New York Fed GDP nowcast model sees Q2 growth at 2.7% SAAR and will be updated Friday. Its initial estimate for Q3 will come in early June.

Dallas Fed manufacturing index is the only U.S. data today. It is expected at -11.3 vs. -14.4 in March. Dallas Fed reports its services reading tomorrow.

EUROPE/MIDDLE EAST/AFRICA

Eurozone started reporting April CPI data. Spain reported first and its EU Harmonised inflation picked up a tick as expected to 3.4% y/y. Germany reports later today and is expected to remain steady at 2.3% y/y. However, German state data already reported point to upside risks to the national reading. France and Italy report tomorrow. France’s EU Harmonised inflation is expected to fall two ticks to 2.2% y/y, while Italy’s is expected to fall a tick to 1.1% y/y. Eurozone also reports tomorrow. Headline is expected to remain steady at 2.4% y/y and core is expected at 2.6% y/y vs. 2.9% in March. Overall, the eurozone disinflationary process is well on track and supports the case for the ECB to begin easing in June.

However, the ECB hawks continue to push back against a July cut. GC member Wunsch said “Cutting again in July would be interpreted by markets to mean that we’re going to cut every meeting. And that would lead to repricing that might go too far.” De Cos, Lane, Muller, and Guindo also speak today.

Sweden reported weak Q1 GDP. GDP came in at -0.1% q/q vs. 0.2% expected and 0.1% in Q4, while the y/y rate came in at -1.1% vs. -0.7% expected and 0.0% in Q4. The Q1 GDP print did not move rate cut expectations too much because the policy relevant CPIF inflation is near the 2% target. The market now sees 55% odds of a rate cut in May vs. 45% before the GDP data, while a June cut remains fully priced in.

ASIA

The Bank of Japan finally intervened today. Vice Finance Minister for International Affairs Kanda would not confirm it, and later said it would be disclosed at the end of May, presumably in the monthly MOF data. Yet the price action certainly suggests the BOJ was in today, despite the holiday in Japan. When it intervened September 22, 2022 to the tune of JPY2.84 trln, the trading range was 140.35-145.90. When it intervened October 21, 2022 to the tune of JPY6.35 trln, the range was even bigger at 146.25-151.95. Today's range so far is similarly large at 154.55-160.15 but with markets thin, we suspect the amount was probably a bit less than the previous JPY6.35 trln intervention. The BOJ can also intervene during our time zone and so markets will remain on alert today. That said, by delivering such a dovish hold last week, the BOJ invited yen weakness and any intervention is likely to be throwing good money after bad, as they say.

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