Yen Leads Foreign Currencies Lower as BOJ Affirms YCC

April 28, 2022
  • U.S. yields are edging higher as risk-off impulses ease; Fed tightening expectations remain robust; we get our first look at Q1 GDP; Fed manufacturing surveys for April will continue to roll out
  • Germany said its companies will continue to pay for Russian gas in euros or dollars; Germany cut its 2022 growth forecast to 2.2% from 3.6% seen in January; eurozone April inflation readings have started to trickle out; ECB tightening expectations have fallen significantly; Riksbank delivered a surprise 25 bp rate hike
  • Two-day BOJ meeting ended with a dovish hold; updated macro forecasts suggest no tightening until FY25; the RBNZ is seeking to define a neutral setting for its macroprudential tools, an incredibly thoughtful but necessary process to undertake

The dollar continues to firm. DXY is up for the sixth straight day and traded today at the highest level since January 2017 near 103.696. That month’s high near 103.82 is very close but after that, there are no significant chart points until the November 2002 high near 107. The euro traded at a new cycle low today near $1.0485. We look for a test of the January 2017 low near $1.0340. If that level breaks, we have to start talking about parity. After a period of consolidation, USD/JPY has resumed its march higher. With the help of a dovish BOJ (see below), the pair traded at a new high near 131. We continue to look for a test of the 2002 high near 135.15. After that, the August 1998 high near 147.65 would start to come into view. Sterling continues to underperform and traded at a new cycle low today near $1.2455. We target the June 2020 low near $1.2250 and then the May 2020 low near $1.2075. Between lingering risk-off impulses and an eventual recovery in U.S. yields, we believe the dollar uptrend remains intact.


U.S. yields are edging higher as risk-off impulses ease. The U.S. 10-year yield traded as low as 2.71% yesterday but has since risen to 2.81% currently. Similarly, the 2-year traded as low as 2.47% Wednesday but has since risen to 2.57% currently. Global equity markets are recovering, with U.S. futures pointing to a higher open. The dollar continues to firm along with the higher yields, which can be chalked up to the dollar smile theory that suggests the dollar will gain during periods of strong U.S. data and rising U.S. rates as well as bouts of risk-off sentiment. Furthermore, we must stress that negative developments in the rest of the world (Russian gas supplies, dovish BOJ, etc.) are playing a big part in the dollar’s strength buy highlighting relative fundamentals that favor the greenback.

Fed tightening expectations remain relatively robust. WIRP suggests 50 bp hikes at the May 3-4 and June 14-15 meetings are fully priced in, with nearly 25% odds of a possible 75 bp move in June. Looking ahead, swaps market is pricing in 275 bp of tightening over the next 12 months that would see the policy rate peak near 3.25%. While this almost meets our own call for a 3.5% terminal rate, we continue to see risks that the expected terminal rate moves even higher if inflation proves to be even more stubborn than expected. The media blackout ahead of the FOMC meeting is in effect and so there will be no Fed speakers until Chair Powell’s post-decision press conference the afternoon of May 4.

We get our first look at Q1 GDP. Growth is expected at 1.0% SAAR vs. 6.9% in Q4. This is above the Atlanta Fed’s GDPNow model, which is currently tracking 0.4% SAAR for Q1. The initial GDPNow estimate for Q2 will come out tomorrow. Of note, Bloomberg consensus for Q2 is currently at 3.0% SAAR, suggesting that q1 weakness is temporary. We concur. To us, recession risks remain low right now as signaled by the 3-month to 10-year curve as well as the Chicago Fed National Activity Index. Of course, with the Fed embarking on an aggressive tightening cycle, the situation must be continuously monitored.

Fed manufacturing surveys for April will continue to roll out. Kansas City is expected at 35 vs. 37 in March. The readings so far have been mixed, as Empire came in at 24.6 vs. -11.8 in March, Philly Fed came in at 17.6 vs. 27.4 in March, Dallas came in at 1.1 vs. 8.7 in March, and Richmond came in at 14 vs. 13 in March. Overall, we believe most signs point to continued strength in the manufacturing sector despite ongoing supply chain issues. Weekly jobless claims data today will be of interest because continuing claims data will be for the BLS survey week containing the 12th of the month. They are expected at 1.399 mln vs. 1.417 mln the previous week, while initial claims are expected at 180k vs. 184k the previous week. Of note, consensus for next Friday’s jobs report is currently at 400k but with the economy pretty much at full employment, the data have taken on less importance.


Germany said its companies will continue to pay for Russian gas in euros or dollars. After Poland and Bulgaria were cut off by Gazprom for refusing to pay in rubles, German Economy Minister Robert Habeck said “The private legal contracts apply” for Russian gas payments. The Economy Ministry added that Germany is following European Union guidance published last week that ruble payments would violate existing sanctions, which means German companies will continue to pay in euros and dollars. Habeck stressed that Germany’s gas supply is “stable” and that “we are doing everything we can to keep it that way.”

Germany cut its 2022 growth forecast to 2.2% from 3.6% seen in January. The 2023 forecast was bumped up slightly to 2.5%. Inflation is forecast to average 6.1% in 2022 before slowing to 2.8% in 2023. Habeck noted that “After two years of the coronavirus pandemic, the war in Russia is adding a new burden. The federal government is doing everything to preserve the substance of our economy, even in difficult times, with a targeted protective shield for our companies, which we are now implementing quickly.”

Eurozone April inflation readings have started to trickle out. Spain’s EU Harmonized headline inflation came in at 8.3% y/y vs. 9.0% expected and 9.8% in March. However, core inflation accelerated a full percentage point to 4.4% y/y. Germany will report later today and is expected to remain steady at 7.6% y/y. However, German state data out already today suggest upside risks to the national number. France and Italy report April CPI Friday. France’s EU Harmonized headline inflation is expected to remain steady at 5.1% y/y, while Italy’s is expected at 7.0% y/y vs. 6.8% in March. Eurozone CPI will also be reported later Friday. Headline is expected to pick up a tick to 7.5% y/y, while core is expected at 3.2% y/y vs. 2.9% in March. If the CPI data come in as expected, there will be less pressure on the ECB to tighten in June.

ECB tightening expectations have fallen significantly. WIRP suggests odds of liftoff June 9 are now less than 15% vs. 40% at the start of this week, while liftoff July 21 remains fully priced in. The swaps market is now pricing in 125 bp of tightening over the next 12 months vs. 150 bp at the start of this week, with another 50 bp (vs. 75 bp) of tightening priced in over the following 12 months that would see the deposit rate peak near 1.25% (vs. 1.75%). While this still seems too aggressive to us, at least markets are recognizing that 1) eurozone inflation may be peaking and 2) the risks to growth are mounting. Indeed, de Guindos said “My assessment is that we are very close to the peak and that we will start to see inflation decline in the second half of the year. Nevertheless, inflation will be high -- even in the last quarter of the year our projections now are that inflation will be above 4%. So we are clearly above our target.”

Riksbank delivered a surprise 25 bp rate hike. Most, including us, were looking for liftoff at the June meeting since it’s hard to reconcile forward guidance for H2 24 liftoff from the last meeting in February with a rate hike at the very next meeting. Yet here we are. The Riksbank said it expects another two or three more hikes this year and also announced a slower pace of asset purchases in H2. The bank raised its inflation forecasts significantly and adjusted its expected rate path upward to imply another 25 bp hike to 0.5% in Q3 22, three more hikes to 1.25% by Q2 23, and one more hike to 1.5% by Q2 24. It sees the policy rates “somewhat below 2%” in three years’ time. Contrast this rather modest path with the swaps market, which is pricing in 175 bp of tightening over the next 12 months followed by another 50 bp over the subsequent 12 months that would see the policy rate peak near 2.5%. Ahead of the Riksbank, Sweden reported Q1 GDP data. The WDA y/y growth rate came in at 3.0% vs. 3.8% expected and 6.2% in Q4, while the q/q rate came in at -0.4% vs. -0.5% expected and 1.4% in Q4.


Two-day Bank of Japan meeting ended with a dovish hold. All policy settings were kept unchanged and the bank said that rates will remain at present or lower levels. It underscored its commitment to Yield Curve Control by announcing it would carry out unlimited fixed rates 10-year JGB purchases every business day at the upper target limit of 0.25%. The bank acknowledged that inflation risks are tilted to the upside and risks to growth are tilted to the downside, which has become a familiar refrain this year. While the bank said that it needs to watch exchange rates and commodity prices, it is clearly demonstrating that neither require any sort of policy response at the moment. By sticking with ultra-loose policy, the BOJ cannot expect anything except further yen weakness.

Updated macro forecasts were released, with FY24 added for the first time. As previously leaked, the FY22 forecast for core inflation was raised to 1.9% vs. 1.1% in January, the FY23 forecast was kept steady at 1.1%, and the new FY24 forecast came in at 1.1%. These forecasts suggest that the current jump in inflation is still considered temporary and are meant to signal no imminent change in BOJ policy. Of note, Japan reported mixed March retail sales and IP data. Sales rose 2.0% m/m vs. 1.0% expected and -0.9% in February, while IP rose 0.3% m/m vs. 0.5% expected and 2.0% in February.

The Reserve Bank of New Zealand is seeking to define a neutral setting for its macroprudential tools. Deputy Governor Hawkesby said it’s important for the bank to find a neutral setting for these tools in the same way it uses a neutral interest rate for monetary policy. Hawkesby said “In a world where macroprudential tools have turned out to be a more permanent feature of the landscape than we initially expected, we think that it is important to consider and explain the neutral macroprudential settings. That way we will not only be able to express whether we think current macroprudential settings are expansionary or contractionary at any time, but also provide a clearer path ahead into the long-term to their neutral settings.” The RBNZ currently uses loan-to-value ratios to limit mortgage lending and is reportedly developing a framework to use debt-to-income ratios as well in the future. He noted that “With potentially more macroprudential tools available as part of a full suite, we will also need to consider and explain how they combine in total to a neutral long-term setting to support financial stability through the cycle. Much like how we publish a projection for the OCR, we should aspire to be able to publish a projection of our macroprudential settings, and to explain how these will assist us achieve our mandate for a stable and efficient financial system.”

This is an incredibly thoughtful but necessary process for the RBNZ to undertake. Central banks around the world have a larger toolbox than their predecessors, with macroprudential tools and balance sheet management now actively used by many. Hawkesby is correct to note that the RBNZ (and others) have to think about neutral policy in a much broader sense than just the policy rate. We look forward to seeing how central bank thinking evolves on this matter in the coming years.

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