Less Talk, More Action

April 25, 2024

Less Talk, More Action

  • USD/JPY broke to multi-decade highs despite the ubiquitous dose of jawboning by Japanese officials.
  • The US Q1 GDP report is the today’s main data event.
  • Turkey’s central bank is expected to keep rates at 50% today.

USD is trading on the defensive against most major currencies. USD is firmer largely against low-yielding Asian currencies, notably JPY. 10-year Treasury yields are trading less than 5pips away from last week’s high around 4.69%. The US Treasury will auction off another sizeable US$44bn of seven-year notes today.

Overall, foreign appetite for US Treasuries is robust. The latest TIC data showed foreign investors (private and official) accumulated US$540bn of Treasury bonds/notes in the 12 months to February, the most since August 2023.

In the short-term, USD can correct a little lower because growth momentum going into Q2 is shifting from the US in favour of other major economies (Eurozone and UK). Nonetheless, the cyclical USD uptrend is intact. The encouraging US macroeconomic backdrop means there is plenty of room for a further reassessment in Fed funds rate expectations in support of a firmer USD and Treasury yields.

The US Q1 GDP report is the today’s main data event (1:30pm London). Growth is expected at 2.5% SAAR vs. 3.4% in Q4 2023, with personal consumption the main driver at 3.0% SAAR. The risks to the GDP print are balanced. For Q1, the Atlanta Fed GDPNow model estimates growth at 2.7% and the New York Fed GDP nowcast model remains at 2.2%.

USD/JPY broke higher above 155.00 to its highest level since 1990 despite ongoing threats of intervention. Japan’s Finance Minister Shunichi Suzuki delivered the ubiquitous dose of jawboning warning he’s “watching FX market closely” and “will take appropriate measures based on what he’s watching closely”. USD/JPY strength is largely a reflection of rising US 10-year Treasury yields. As such, MOF/BOJ intervention will slow rather than reverse the uptrend in USD/JPY. In the meantime, JPY will take its cue from Japan’s April Tokyo CPI and the outcome of the BOJ meeting tomorrow.

The BOJ is widely expected to keep the policy rate target at 0 to 0.10%. However, the BOJ may raise slightly its 2024 core inflation projections implying greater room to tighten policy and can offer JPY near-term support. As a background, annual March core (ex-fresh food) and core (ex-fresh food & energy) inflation tracked at 2.6% (BOJ 2024 forecast: 2.4%) and 2.9% (BOJ 2024 forecast: 1.9%), respectively. We are sticking to our view that the BOJ tightening cycle will be modest because underlying inflation in Japan is trending lower. The swap market implies 25bps of rate hikes in 2024 and 50bps over the next two years.

EUR/USD and GBP/USD are edging higher on improving UK and Eurozone growth outlook. The UK CBI quarterly business optimism rose to 9 in April, the highest since July 2021. In Germany, the recovery in consumer sentiment is projected to continue in May as the Gfk confidence indicator increased to a two-year high of -24.2 vs. -27.3 in April. ECB President Christine Lagarde speaks later this morning (10:15am London).

USD/CAD is drifting lower under 1.3700. The Bank of Canada’s (BOC) April Summary of Deliberations showed there was a diversity of views about when to start easing but agreement that monetary policy easing would probably be gradual. Some member emphasised that “the risk had diminished that restrictive monetary policy would slow the economy”. Other members “felt there was a risk of keeping monetary policy more restrictive than needed” given the progress made in bringing inflation down. The division within the BOC governing council suggests the bar is high for rate cut in June (56% priced-in).

Turkey’s central bank is expected to keep rates at 50% today (12:00pm London). At the last policy meeting March 21, the bank delivered a hawkish surprise and hiked rates 500bps to 50.0% vs. no change expected. With inflation still accelerating, the risk is the central bank delivers another hawkish surprise. In March, headline CPI inflation quickened to 68.50% y/y vs. 67.07% in February and core CPI surged to a new high of 75.21% vs. 72.89% in February. The swaps market is pricing no policy change over the next three months.

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