Yen Takes a Dive

April 26, 2024

Yen Takes a Dive

  • JPY hit by a double whammy of a dovish BOJ hold and subdued Tokyo CPI inflation.
  • US inflation heats up and GDP growth undershoots. The March Personal Income and Outlays report is up next.
  • Treasury yields are lower this morning. US equity futures are up. USD is down except against the low-yielding JPY and CHF. Commodity-sensitive currencies are outperforming, led by AUD.

USD/JPY spiked-up to fresh highs above 156.00 after the Bank of Japan (BOJ) delivered a dovish hold. As was widely expected, the BOJ kept the policy rate target at 0 to 0.10%. But the BOJ’s updated macro forecasts remain consistent with a gradual and modest tightening cycle. The projected real GDP growth for fiscal 2024 is 0.4pts lower at 0.8%, mainly reflecting lower private consumption. The 2024 projection for core CPI all items less fresh food was raised 0.4pts to 2.8% but was unchanged at 1.9% for core CPI all items less fresh food & energy. There were no material revisions to the 2025 real GDP and CPI forecasts.

Moreover, BOJ Governor Kazuo Ueda struck a cautious tone during his post-meeting press conference. Ueda did not specify when the BOJ will start to cut purchases of government bonds and pointed out that certainty for achieving the inflation target is rising gradually. Interestingly, Ueda noted that the weak yen is not having a big impact on underlying prices yet, reducing risk of an imminent intervention.

The significantly softer than expected April Tokyo CPI report (a leading indicator of Japan’s CPI data) also suggests the BOJ will remain very cautious removing policy accommodation. Annual headline Tokyo CPI inflation slowed to 1.8% in April (consensus: 2.5%) from 2.6% in March. Annual core ex-fresh food eased sharply in April to a two-year low of 1.6% (consensus: 2.2%) vs. 2.4% in March. Core ex-fresh food and energy dropped to a 19-month low of 1.8% (consensus: 2.7%) vs. 2.9% in March.

Bottom line: Widening US-Japan bond yield spreads supports the uptrend in USD/JPY. As such, MOF/BOJ intervention will at best cushion or slow the decline in JPY.

The US Q1 GDP report rocked financial markets yesterday. 10-year Treasury yields surged briefly by as much as 10bps to near a six-month high around 4.74% and US stocks sold-off before recovering later in the session. USD initially strengthened but quickly pared back gains. 10-year Treasury yields are lower this morning near 4.68% and S&P500 futures are up almost 1%. USD is down except against the low-yielding JPY and CHF. Commodity-sensitive currencies are outperforming, led by AUD.

The US Q1 GDP report was mixed but reinforces the case for the Fed to keep the policy rate high for longer. Indeed, the timing of a first full Fed funds rate cut started to shift from November to December while Fed funds futures now imply 70% odds of two cuts this year (vs 80% odds earlier this week).

The US economy grew at a 1.6% annualized rate in Q1, well below the 2.5% consensus and down from 3.4% growth in Q4. But underneath the surface the US economy is performing well underpinned by solid domestic demand. Final sales to private domestic purchasers (excluding inventories, trade and government spending) increased at an annualised rate of 3.1%, vs. 3.3% in Q4 and 3.0% in Q3.

The bigger concern is the inflation flare up. The core PCE deflator rose at an annualised rate of 3.7% in Q1, above the 3.4% consensus and up from 2.0% in Q4. This suggests upside risk to today’s monthly US PCE print (1:30pm London).

In March, US headline PCE inflation is expected to rise a tick to 2.6% y/y while core is projected to ease a tick to 2.7%. Of note, momentum in underlying inflation has picked up with the 3 and 6-month annualized change in core PCE running at 3.5% and 2.9% in February, respectively. The Cleveland Fed’s inflation Nowcast model estimates both headline and core PCE rose 0.3% m/m or 2.7% y/y.

Meanwhile, the March personal spending and income data will likely showcase the strength of the US consumer (1:30pm London). Market participants have penciled-in income and spending to rise 0.5% m/m (vs. 0.3% in February) and 0.6% (vs. 0.8% in February), respectively. We see upside risk to personal spending following the 1.1% m/m surge in control group retail sales.

Bottom line: the cyclical USD uptrend is intact underpinned by the encouraging US macroeconomic backdrop. But in the short-term, USD can correct a little lower because growth momentum going into Q2 is shifting from the US towards other major economies.

EUR/USD is firm above 1.0700 and will partly be guided today by the ECB’s March consumer inflation expectations survey and money supply data (both at 9:00am London). Broad monetary growth (M3) is expected to rise 0.6% y/y vs. 0.4% in February. If so, it would be the fourth straight month of growth and confirm that a recovery Eurozone economic activity is underway.

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