Yen Volatile as Intervention Risks Rise

March 27, 2024
  • The impact of the Baltimore bridge collapse on trade and commerce could be significant; Fed speakers continue to command attention after last week’s FOMC meeting; Q1 GDP growth remains solid; consumer confidence measures are leveling off
  • Eurozone March CPI data started rolling out; the ECB is on track to cut rates in June; Riksbank kept rates steady at 4.0%, as expected; SARB is expected to keep rates steady at 8.25%; Hungary will slow its pace of easing in Q2
  • Japan’s MOF, BOJ, and FSA held a meeting; Australia reported February CPI; New Zealand is pressing on with tax cuts

The yen has been the big mover today as intervention risks rise. USD/JPY traded at the highest level since July 1990 near 152 but has since fallen back to around 151.10 after reports of a meeting between Japan’s MOF, BOJ, and FSA (see below). Otherwise, FX markets remain in familiar ranges. DXY is trading flat near 104.284, not far below Friday’s cycle high near 104.428. The euro is trading flat near $1.0835 while sterling is trading higher near $1.2635. SEK was largely unmoved by the Riksbank’s dovish hold (see below). The dollar recovery should continue after this period of consolidation, not just on dovish developments from other central banks but also from Fed repricing. The U.S. data continue to come in mostly firmer and it’s clear from the Dot Plots (see below) that most Fed officials remain very cautious about easing too much or too soon. We believe that the current market easing expectations for the Fed still need to adjust. When they do, the dollar should gain even further.


The impact of the Baltimore bridge collapse on trade and commerce could be significant. With activity at the port suspended indefinitely, cargo shipments will have to diverted to other ports, raising the risks of backlogs and congestion. While shipping analysts warn of potential bottlenecks and possible cost increases, most view these risks as temporary and manageable. Recall that in the February ISM manufacturing PMI, supplier deliveries rose to 50.1 vs. 49,1 in January while backlog of orders rose to 46.3 vs. 44.7 in January. Both are the highest since September 2022 and the higher these numbers are, the greater the strains in the supply chains. If both these numbers are impacted by the port closure, this would be a bad sign for inflation going forward. While the fall in the prices paid component to 52.5 in February was welcome news, it remains in inflationary territory and is another reason for the Fed to remain cautious. Stay tuned.

Fed speakers continue to command attention after last week’s FOMC meeting. Waller speaks today. He has emerged as a leading hawk after the departure of Bullard and so Waller’s comments will be key. Will he reveal his 2024 Dot as Bostic and Goolsbee have? Stay tuned. Recall that in the latest Dot Plots, 1 saw four cuts, 9 saw three cuts, 5 saw two cuts, 2 saw one cut, and 2 saw no cuts. As such, the unchanged 2024 median boiled down to just one dove that kept their Dot at three. We expect other FOMC members to reveal their Dots in the coming days.

Q1 GDP growth remains solid. The Atlanta Fed’s GDPNow model is tracking Q1 growth at 2.1% SAAR and will be updated Friday after the data. Elsewhere, the New York Fed’s Nowcast model is tracking Q1 growth at 1.9% SAAR, up from 1.8% previously. Looking ahead, it is tracking Q2 growth at 2.2% SAAR, up from 2.1% previously. This model is updated every Friday.

Consumer confidence measures are leveling off. Conference Board reported its measure for March and headline came in at 104.7 vs. 107.0 expected and a revised 104.8 (was 106.7) in February. Present situation rose to 151.0 vs. a revised 147.6 (was 147.2) in February, but this was more than offset by a drop in expectations to 73.8 vs. a revised 76.3 (was 79.8) in February. University of Michigan reports its final March reading Friday. Headline is expected to remain unchanged from the preliminary at 76.5. While both measures are down from their highs, we believe they remain high enough to support solid consumption as we move into Q2.


Eurozone March CPI data started rolling out. Spain reported its EU Harmonised inflation at 3.2% y/y vs. 3.3% expected and 2.9% in February. Spain is one of the few eurozone countries to report core inflation and it came in at 3.3% y/y vs. 3.4% expected and 3.5% in February. France and Italy report Friday. France’s EU Harmonised inflation is expected at 2.8% y/y vs. 3.2% in February, while Italy’s is expected at 1.5% y/y vs. 0.8% in February. Germany reports next Tuesday and eurozone reports next Wednesday.

The ECB is on track to cut rates in June. Official messaging has led the market to largely price in the first cut at the June 6 meeting. Cuts are then fully priced in for September 12 and October 17, while the market sees 70% odds of a fourth cut December 12. Cipollone said “If incoming data confirm the scenario foreseen in the March projections, we should stand ready to swiftly dial back our restrictive monetary policy stance.” Kazaks spoke about easing and noted that “Financial markets are pricing in that it could be in June, and I don’t have any objection at the moment to that.”

Riksbank kept rates steady at 4.0%, as expected. it said policy was left at the current settings because “inflationary pressures are still somewhat elevated.” However, it was a dovish hold as the Riksbank indicated “that the policy rate can be cut in May or June if inflation prospects remain favorable.” Of note, the market now sees 85% odds of a cut May 8 vs. 50% back in mid-March. The Riksbank also cautioned that monetary policy should be “adjusted cautiously going forward, in the form of gradual cuts in the policy rate.” The Riksbank’s expected rate path sees the policy rate averaging 3.20% in Q1 2025 vs. 4.10% previously and averaging 2.76% in Q1 2026 vs. 3.78% previously. The bank’s policy rate forecasts have basically converged with market pricing and so SEK downside has been limited.

South African Reserve Bank is expected to keep rates steady at 8.25%. Another hawkish hold is expected as last week, February CPI came in higher than expected, with headline at 5.6% y/y vs. 5.3% in January and core at 5.0% y/y vs. 4.6% in January. At the last meeting January 25, the bank delivered a hawkish hold as Governor Kganyago warned “At the current repurchase rate level, policy is restrictive, consistent with the inflation outlook and the need to address rising inflation expectations. Serious upside risks to the inflation trajectory from global and domestic sources are evident.” The swaps market is pricing in 25 bp of easing over the next 12 months, followed by another 25 bp over the subsequent 12 months.

Hungary central bank will slow its pace of easing in Q2. After cutting rates yesterday by 75 bp to 8.25%, Deputy Governor Virag said “We’ve entered a new phase of monetary policy. In the second quarter, the rate-cut pace will slow.” However, he added that market expectations for a policy rate of 6.5-7.0% by mid-year were “realistic.” The next three meetings are April 23, May 21, and June 18. If the bank cuts 50 bp at each, the policy rate would be 6.75% by mid-year.


Japan’s Ministry of Finance, Bank of Japan and Financial Services Agency held a meeting. Vice Minister of International Affairs Kanda held a press briefing after the meeting ended and warned “The recent weakening of the yen cannot be said to be in line with fundamentals, and it is clear that speculative moves are behind the yen’s fall. We will take appropriate action against excessive moves without ruling out any options.”. Ahead of the meeting, Finance Minister Suzuki warned again that “We are watching market moves with a high sense of urgency. We will take bold measures against excessive moves without ruling out any options.” Before the meeting, USD/JPY traded at the highest level since July 1990 near 152 but has since fallen back to around 151.30. The meeting with key policymakers is an escalation beyond just jawboning but fall far short of actual action. As such, we expect the market to continue testing their commitment to defending the yen.

Australia reported February CPI. Headline came in a tick lower than expected and was steady from both December and January at 3.4% y/y. However, trimmed mean came in at 3.9% y/y vs. 3.8% in January and was the first acceleration since April 2023. Sticky inflation supports the cautious stance by the RBA, with markets now seeing only around 70% odds of a cut August 6 vs. being nearly priced in back in mid-March.

New Zealand is pressing on with tax cuts. Finance Minister Willis said tax relief will be announced in the May budget and will be enacted July 1. She did not offer any details except to say that there will be adjustments to the tax bracket thresholds. Willis stressed that “Tax reductions will be funded within the operating allowance through a mixture of savings, reprioritization and additional revenue sources. We won’t have to borrow extra to provide tax relief and we won’t be adding to inflationary pressures.” Of note, the Treasury Department’s forecasts in this budget statement showed weaker growth ahead. Growth for FY2024 ending in June is seen at 0.1% vs. 1.5% in December, while projected tax revenues for the five years through FY2028 are NZD13.9 bln lower than previously forecast. Willis said the revised projections suggest a surplus in FY2028 “is achievable, but not a given.”

We await more details before passing judgment. However, we note that cutting taxes during a downturn puts added pressure on the budget. Even without tax cuts, slower growth tends to boost budget deficits as revenues fall and outlays rise. This is what countercyclical fiscal policy is meant to do. While tax cuts could boost growth, it comes at a fiscal cost. Previous U.K. Prime Minister Truss tried to cut taxes back in 2022 and was roundly punished by the markets and by her own party. Stay tuned.

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