Yen Slumps to Lowest Levels in 34 Years Against Dollar Prior to BOJ Meeting

Economic

Forex

Summary:

On Thursday, the yen reached its lowest point in 34 years against the dollar and 16 years against the euro. Investors anticipate that the Bank of Japan's upcoming policy meeting, concluding on Friday, will lack sufficient hawkishness to bolster the Japanese currency.

On Thursday, the yen plummeted to its lowest levels in 34 years against the dollar and 16 years against the euro, driven by investor anticipation of the Bank of Japan's policy meeting outcome. The dollar surged to a 34-year high of 155.74 yen, breaching a significant psychological threshold, while the euro reached a 16-year peak of 166.98 yen. Market participants view the breach of the 155 yen level as a potential trigger for Tokyo authorities to intervene, though the efficacy of such measures remains uncertain given prevailing market sentiment.

Speculation regarding potential intervention by Japanese authorities has intensified, particularly as the yen's depreciation continues unabated. Concerns persist that even intervention may not suffice to stem the yen's decline, with some analysts suggesting a possible ascent to 160 yen against the dollar. BOJ Governor Kazuo Ueda is expected to exercise caution, mindful of previous instances where dovish remarks led to substantial yen depreciation, necessitating intervention to stabilize the currency.

The prospect of prolonged low interest rates in Japan, coupled with expectations for delayed rate cuts in the United States, has further weighed on the yen. Despite expectations for a marginally hawkish outcome from the BOJ meeting, the prevailing economic environment suggests limited scope for significant yen appreciation. Policy tightening expectations and a persistently low terminal policy rate underscore the challenges facing the yen, which remains at historically depressed levels.

Meanwhile, the dollar experienced some losses against other currencies following upbeat economic data from the eurozone and the UK earlier in the week. The euro and sterling strengthened in response to positive business activity indicators, exerting downward pressure on the dollar. Despite this, the dollar index, a measure of its value against a basket of currencies, remains relatively steady, albeit pulling away from recent lows.

Investors are closely monitoring upcoming U.S. economic data, particularly the first quarter core gross domestic product (GDP) price deflator. This data point is seen as pivotal in providing insights into Friday's release of the Personal Consumption Expenditure (PCE) price index, which serves as the Federal Reserve's preferred inflation gauge. Any surprises in these figures could potentially influence market sentiment and impact currency valuations.

In Asia, trading activity was subdued, with Australian markets closed for a holiday. The Australian dollar edged higher, buoyed by diminished expectations of rate cuts by the Reserve Bank of Australia following a softer-than-expected consumer price inflation reading for the first quarter. Similarly, the New Zealand dollar advanced, supported by positive market sentiment.

The yen's decline to multi-year lows against major currencies reflects ongoing market expectations regarding the Bank of Japan's policy stance and broader economic conditions. Despite potential intervention by Japanese authorities, the yen's trajectory remains uncertain amid prevailing global economic trends and central bank policies. Market participants are closely monitoring upcoming economic data releases for further insights into currency market dynamics and potential trading opportunities.

Source: Reuters

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Data Interpretation

On April 25 local time, GfK released the latest German Consumer Confidence Index:

The German Consumer Confidence Index for May stands at -24.2, compared to the expected -26 and the previous value of -27.3 (revised).

The improving trend in German consumer confidence observed in April persists, with significant increases in income expectations, economic outlook, and willingness to purchase. Consumer confidence has improved for the third consecutive time, reaching its highest point in two years.

Compared to previous periods, the improvement in consumer sentiment is primarily driven by better income expectations. In April, consumer income expectations rose for the third consecutive time, reaching 12.2. One of the reasons for the real income growth is significant increases in wages and government pensions, with expectations of further increases in the coming months. Additionally, the decline in inflation has enhanced the real purchasing power of households.

However, despite the slight upward adjustment in economic expectations for the third consecutive time, the economy is still not experiencing sustained recovery from the consumers' perspective. Increased savings intentions hinder further improvement in the consumer environment. Although consumer confidence has improved, it remains at a very low level. This is reflected in the slight increase in the willingness to save, which gained 2.5 points and remained at an extremely high level of 14.9. Twelve months ago, the index was as low as 1.8, indicating an increase in savings intentions compared to a year ago.

Consumers, facing multiple crises, lack confidence in future economic development. They perceive a lack of clear and credible prospects for the country's future development, which also leads to insufficient momentum in domestic demand.

Germany GfK Consumer Confidence for May

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Danske Bank

Forex

Economic

In focus today

In the US, today's focus will be on Q1 flash GDP data, where consensus expects growth to moderate to 2.4% Q/Q AR (Q4 3.4%). Private consumption has remained on a gradually cooling, yet steady trend, while private manufacturing investments and public state and local investments are still supported by past stimulus measures. That said, April PMI data released earlier this week suggested that Q2 has started on a relatively weaker footing.

In the euro area, Isabel Schnabel will deliver the opening remarks for a monetary policy conference in Frankfurt. Christine Lagarde delivers a speech at a conference on the Capital Market Union in Paris. Today's list of ECB speakers also includes Vujcic, Nagel and Panetta. The ECB will also publish its economic bulletin today.

In Sweden, we get the last NIER Economic Tendency Survey (at 9.00 CET) before the Riksbank's upcoming policy rate decision 8 May. Companies' pricing plans will be of high importance. Overall, companies' price plans are now compatible with an inflation rate of 2% (being in line with pre-pandemic averages), but there is perhaps a question mark around the services sector, where we saw an uptick in price plans last month. Riksbank's Aino Bunge participates in a seminar on “Functioning Payments in Crisis and War”. Despite the topic of the seminar, we will likely get some comments on monetary policy as Bunge will be available for journalists after the event (around 14.15 CET).

The Central Bank of Turkey announce their rate decision, after their monetary policy meeting. Market consensus is in favour of unchanged interest rate, with some forecasters eyeing a possible hike.

Economic and market news

What happened overnight

The JPY continues to weaken with USD/JPY hitting as high as 155.48 in overnight trading. The Japanese monetary and fiscal authorities have earlier said that they are concerned with the continuously weakening of the JPY, and have threatened to intervene in the market over several occasions, but we are still to see some action on the matter.

What happened yesterday

In the US, President Biden signed the USD 95 billion bill with military aid for Ukraine, Israel, and Taiwan. He later stated that some of the aid for Ukraine would be sent to them already Wednesday evening.

Yesterday's fixed income sell-off has pushed 10y UST yield near recent highs. 10Y UST yields ended up by 5bp in 4.65% for the day.

Meta, the company behind Facebook and Instagram, presented forecasts of higher AI expenses and lighter-than-expected revenue, leading to the share falling 10% in after-hours trading. Alphabet, the parent of Google, fell 3% in extended trading and Microsoft fell 2% as investors fear that they may have underestimated the costs of the AI race among big tech companies. Both companies will deliver financial statements for Q1 today.

In Germany, the Ifo indicator showed that business sentiment increased more than expected in April to 89.4 (cons: 88.8, prior: 87.9). Both the assessment of the current situation and future expectations rose more than expected. Note that the index still indicates that the German economy is in contractionary territory.

ECB's Nagel said that a June rate cut will not necessarily be followed by a series of rate cuts. He is still worried about a potential inflation rebound, especially service inflation, which has proved more persistent than goods inflation, and is driven by continued strong wage growth.Yesterday's market movements

Equities. Global equities ended marginally higher yesterday after a bit of a roller-coaster ride in both Europe and US. It was a huge reporting day which helps explain the fairly rare mix of sector performance with financials, industrials and healthcare underperforming. The earnings season is peaking today, and that coupled with reports we saw in the afterhours yesterday means that we should prepare for yet another day micro dominating markets. In the US yesterday, Dow -0.1%, S&P 500 +0.02%, Nasdaq +0.1%, and Russell 2000 -0.4%. Asian markets are sharply down this morning, led lower by the afterhours earnings results from the US and even more so, the disappointing company guidance. European futuress are marginally lower this morning while US futures are dragged down by the tech sector.

FI: The Bund curve continued bear-steepening in yesterday's session with the 10Y tenor up by 9bp for the day, closing at a 5-month high of 2.59%. The repricing happened gradually through the day without a clear catalyst triggering the move. The 10Y German auction yesterday was well-bid with BTC at 2.5. However, with Eurozone PMI/IFO data showing strong signs of recovery, additional uncertainty on the disinflationary trajectory is now evident in the remarks coming out from the hawkish ECB members.

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Economic

Bond

Forex

Markets

Core bonds drifted away again yesterday. In the US, Treasuries reversed Tuesday's (disappointing) PMI-induced spike higher. Weakening demand and a slight tail at the US Treasury's record $70bn 5-yr Note sale kept UST's near intraday lows going into the close. The longer end of the curve underperformed with the front end locked in the run-up to next week's FOMC meeting and following a sharp, higher for longer, repositioning since mid-March.

We argued before that at least some part of the market/investor community needs to be contemplating a rate hike instead of a cut as the Fed next move to push the US 2-yr yield back above the psychological 5% mark. US yields eventually added up to 4.4 bps for the 30-yr gauge which tested the YTD top at 4.8%. German Bunds extended their (consensus-beating Ifo) underperformance. German yield increased by 4.9 bps (2-yr) to 8.2 bps (30-yr).

Unlike in the US, European money markets are still banking on (at least) three 25 bps ECB rate cuts this year. We continue to err on the hawkish side of this prognosis. The German 10-yr yield touched 2.6% for the first time since the end of November of last year. This level coincides with 62% retracement on the Q4 setback in yields. A break higher would be technically significant, opening the path for a full return to 3%. Contrary to Tuesday, EUR/USD failed to profit from the interest rate advantage with the pair closing near unchanged at 1.07. Major US and EMU equity benchmarks closed with minor losses.

Overnight risk sentiment is strongly negatively impacted by a disappointing outlook in Q1 Meta earnings. Nasdaq futures suffer losses of 1.5%. Main Japanese and South Korean bourses record similar losses. The risk environment doesn't translate into stronger US Treasuries or a dollar, which both trade rather stable. The Japanese yen moved beyond USD/JPY 155 for the first time since 1990 yesterday with the pair currently changing hands at 155.66 in the run-up to tomorrow's BoJ policy meeting (including new growth and inflation forecasts).

We don't think that any “hawkish” hints on “more” policy normalization down the road will be sufficient to save the ailing currency. It will likely take another hit which could prompt officials to move from verbal to effective interventions. As seen in the (recent) past, such moves often offer only temporary relief without backing from the BoJ.

News & Views

National Bank of Poland (NBP) policymaker Kotecki said that recent softer data is slowly tilting the interest rate debate in Poland toward rate cuts. Kotecki's base scenario nevertheless remains one where interest rates stay at current level until the end of this year. Recent macro indicators “minimally increase the probability of a rate cut, since it's clear that the economy isn't accelerating and is far from overheating”. After touching 2% in March, Kotecki expects inflation to be between 5.5% and 6% at the end of the year as the government scaled back subsidies to mitigated energy bills.

In this scenario, the NBP could start discussing mild rate cuts if at the end of the year if inflation data show price growth returning to the NBP's target ‘for good' in H2 2025 or in early 2026. After a 1% cumulative rate cuts in September and October last year, the NBP since then kept its policy rate unchanged at 5.75% and indicated that rates were likely to stay on hold as inflation risks persist.

South Korean growth beat expectations by a wide margin this morning. Activity accelerated to 1.3% Q/Q in Q1 2024 (vs 0.6% consensus) from 0.6% in Q4 2023, raising Y/Y growth from 2.2% to 3.4%. Growth in domestic demand was an important driver behind the solid growth performance with private expenditure rising 0.8% Q/Q. Government expenditure (0.7% Q/Q) and construction investment also added to the strong performance.

Export growth continued at a solid 0.8% Q/Q. In a sector approach, manufacturing (1.2% Q/Q), construction (4.8% Q/Q) and services (0.7%) all show strong figures. In a first reaction, the Bank of Korea took a cautious approach. It admitted that growth seems to be stronger than int the February forecast and that current data will be incorporated in the new update in May. Still the BoK considers it too early to say if consumption has turned the corner. In March the BoK already acknowledged that there could be upside risk to its 2.1% forecast for this year. The BoK currently holds its policy rate at 3.5%. Stronger data might delay rate cuts that were expected for H2 this year.

Graphs

GE 10y yield

ECB President Lagarde clearly hinted at a summer (June?) rate cut and seems to have broad backing. EMU disinflation will continue the next two months and bring headline CPI (temporary) at/below the 2% target. Together with weak growth momentum, this gives backing to deliver a first 25 bps rate cut. A more bumpy inflation path in H2 2024 and the Fed's higher for longer strategy make follow-up move difficult.

US 10y yield

The March dot plot contained several hawkish elements including a symbolically higher neutral rate. In our view they set the stage for a later (September at the earliest) start of a possibly shallower cutting cycle. Upcoming CPI readings (through base effects) and resilient eco data should confirm this. US yields continue to enjoy a solid bottom across the maturity spectrum, setting fresh YTD highs.

EUR/USD

Economic divergence (US > EMU) and a likely desynchronized rate cut cycle with the ECB exceptionally taking the lead pulled EUR/USD towards the YTD low at 1.0695. Stronger-than-expected US March inflation figures forced a technical break, opening the path to last year's low at 1.0494.

EUR/GBP

Debate at the Bank of England is focused at the timing of rate cuts. Most BoE members align with the ECB rather than with Fed view, suggesting that the disinflation process provides a window of opportunity to make policy less restrictive (in the near term). Sterling's downside turned more vulnerable with the topside of the sideways EUR/GBP 0.8493 – 0.8768 trading range serving as the first real technical reference.

Source: KBC Bank

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Thomas

Central Bank

Economic

Forex

Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen, as traders drive down the currency on expectations that any further interest rate hikes by the central bank will be slow in forthcoming.

Below are details on how yen-buying intervention works:

Last confirmed yen-buying intervention?

Japan bought yen in September 2022, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.

Why step in?

Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.

But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.

What happens first?

When Japanese authorities escalate their verbal warnings to say they "stand ready to act decisively" against speculative moves, that is a sign intervention may be imminent.

Rate checking by the BOJ - when central bank officials call dealers and ask for buying or selling rates for the yen - is seen by traders as a possible precursor to intervention.

What happened so far?

Finance Minister Shunichi Suzuki told reporters on March 27 that authorities could take "decisive steps" against yen weakness - language he hasn't used since the 2022 intervention.

Hours later, Japanese authorities held an emergency meeting to discuss the weak yen. The meeting is usually held as a symbolic gesture to markets that authorities are concerned about rapid currency moves.

After the warnings failed to arrest the yen's fall, South Korea and Japan won acknowledgement from the United States over their "serious concerns" about their currencies' declines in a trilateral meeting held in Washington last week.

The market impact of the agreement did not last long. The dollar continued its ascent and notched a 34-year high of 155.74 yen on Thursday, driving past the 155 level seen as authorities' line in the sand for intervention.

Next line in the sand?

Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.

While the dollar has moved above the psychologically important 155 level, the recent rise has been gradual and driven mostly by U.S.-Japanese interest rate differentials. That may make it hard for Japan to argue that recent yen falls are out of line with fundamentals and warrant intervention.

Some market players bet Japanese authorities' next line in the sand could be 160. Ruling party executive Takao Ochi told Reuters the yen's slide towards 160 or 170 to the dollar could prod policymakers to act.

What's the trigger?

The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened in 2022.

Prime Minister Fumio Kishida may feel the need to prevent further yen falls from pushing up the cost of living with his approval ratings faltering ahead of a ruling party leadership race in September.

But the decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.

How would it work?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.

To support the yen, however, the authorities must tap Japan's foreign reserves for dollars to sell for yen.

In either case, the finance minister issues the order to intervene and the BOJ executes the order as the ministry's agent.

Challenges?

Japanese authorities consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.

Washington gave tacit approval when Japan intervened in 2022, reflecting recent close bilateral relations.

Finance Minister Suzuki said last week's meeting with his U.S. and South Korean counterparts laid the groundwork to act against excessive yen moves, a sign Tokyo saw the meeting as informal consent by Washington to intervene as needed.

A looming U.S. presidential election may complicate Japan's decision on whether and when to intervene.

In a social media post on Tuesday, Republican presidential candidate Donald Trump decried the yen's historic slide against the dollar, calling it a "total disaster" for the United States.

There is no guarantee intervention will effectively shift the weak-yen tide, which is driven largely by expectations of prolonged low interest rates in Japan. BOJ Governor Kazuo Ueda has dropped hints of another rate hike but stressed that the bank will tread cautiously given Japan's fragile economy.