yield curve control

In the end it all boils down to data That tension between persistently high inflation and recession fears is of course a wider and ongoing market theme. Indeed, yesterday’s market reaction to the ECB and the quick fade was probably more down to mixed US data releases that came out just when Lagarde was set to speak.   More hints that US pipeline pressures are easing came from import prices falling faster than expected. And we also saw the weekly jobless claims grind higher again suggesting a softening of the jobs market. As our economist notes, probably not enough to deter the Fed from a potential hike in July following the hawkish pause this week, but enough to keep the market concerned about the outlook. As opposed to the bear flattening in EUR, the US curve bull flattened with the 10Y UST yield dipping towards 3.7% Overall, central banks this week have given themselves the flexibility and room to tighten policies further should data warrant it, keeping upward pressure on front-end rates. Yield curves could invert further but given how far they already stretch, long-end rates could still follow higher in the near term. Only the Bank of Japan (BoJ) bucked the hawkish trend set by the Fed and ECB (and likely continued by the BoE next week) today by leaving policy rates unchanged and dismissing calls for an adjustment higher of its yield curve control cap, currently standing at 0.5%. The lack of action today and the view put forward that the current spike in inflation will prove temporary leaves the market guessing about the timing of a potential normalisation of the BoJ's policy setting.   The long-end reflects markets skepticism with 2s10s curves inverting further Today's events and market view Some calm may return to markets after the key events of this week. It probably won't last too long with UK inflation and the Bank of England decision lined up for next week. And in the US we will also see Fed Chair Jerome Powell giving testimony to Congress.  As for today, in the eurozone we will see the release of the final inflation figures for May, but more attention should go to the usual flurry of ECB speakers in the wake of the meeting, though Lagarde pointed out the “broad consensus” around yesterday’s decision. And it seems the ECB has been successful in curbing the market's preoccupation with the terminal rate level and focussing it on a high-for-longer discussion – note the pricing out of future rate cuts as a driver of the front-end move higher since last week. The main US data release today is the University of Michigan consumer confidence survey, which also includes measures of longer-term inflation expectations. The consensus is for a slight downtick in the latter to 4.1% year-on-year for the 1-year horizon and to 3% for the 5 to 10-year inflation. But we will also see a number of Fed speakers for the first time after the FOMC meeting. In the end, the data will remain the key, for central banks to assess whether they have done enough on inflation, or markets to discern whether too much has been done already to hurt the economy.

Asia Morning Bites Japanese core inflation excluding food and energy edges higher in May - tees up the Bank of Japan for a July tweak to policy.   Global Macro and Markets Global markets:  After several days of decline, US stocks turned around on Thursday, and equity futures indicate that they may have a little further to go today. The S&P 500 rose 0.37%, while the NASDAQ rose 0.95%. China was out for Dragon Boat Day and will be out today too.  US Treasury yields went higher again. The Yield on both the 2Y note and the 10Y bond rose 7.6bp, taking 10Y yields to 3.795%. 10Y UK Gilt yields fell 3.8bp after the larger-than-expected Bank of England hike. EURUSD pushed above 1.10 yesterday, despite the rise in US yields, but it could not hold on to its gains and has retreated back to 1.0956 – not much changed from 24 hours ago.  G-10 currencies including the AUD and JPY lost ground to the USD, but GBP was steadier, helped by higher rates. Most Asian currencies weakened against the USD yesterday. The THB rose to 35.075, and the SGD rose to 1.3447. USDCNH has risen to 7.1957 and topped 7.20 overnight.   G-7 macro: There were further hawkish comments from Jerome Powell overnight, who said that the US may need one or two more rate hikes. Barkin also indicated that he was happy to see rates go higher. The main macro release from the US for the day was existing home sales. Lack of supply seems to be helping house prices to remain supported, as James Knightley writes here. Initial jobless claims held on to the recent highs at 264K, though continuing claims drifted a little lower. Not quite a smoking gun for the labour market, but it is becoming a little more interesting. The Bank of England’s 50bp hike took markets by surprise. James Smith and Chris Turner write about it here. James notes, “We’re tempted to say that today’s 50bp move won’t become a new trend, but two further 25bp hikes seem like the most likely route after today’s meeting”. Today is another quiet day for macro releases, with nothing of note from the US and only retail sales from the UK to look at.   Japan:  May inflation data came out slightly higher than expected. The headline inflation rate was 3.2% YoY in May (vs 3.5% in April, 3.2% market consensus) but core (3.2%) and "core-core" (4.3%) inflation beat market expectations. Inflation excluding food and energy even rose from 4.1% in April. The headline CPI index was unchanged month-on-month, but goods prices fell 0.1% MoM sa, while service prices rose 0.1%. Housing, transportation, telecommunications, and entertainment prices continued to rise, while utilities fell again. We think there are signs of inflationary pressure building up on the supply side, but it is certainly not strong enough for the BoJ to bring about immediate tightening.Looking ahead, the current energy subsidy program will end in September and some power companies will begin to raise electricity fees again. Thus, we see headline inflation staying above 2% for a considerable time. We expect June Tokyo inflation, released next week, will also pick up again.  We think that the BoJ will upgrade its inflation outlook in July and a yield curve control (YCC) tweak is still possible despite the dovish comments from several board members. They will probably justify their action by saying that a YCC tweak is not a tightening, but instead, that it is done to improve market functionality. Another reason that we think a July tweak is possible is that a shift in YCC may need to come as a surprise to avoid a large bond selloff. Singapore:  May inflation is set for release today.  The market consensus points to a slight softening in inflation with core and headline inflation slipping to 4.7%YoY and 5.4%YoY, respectively.  Continued robust domestic demand is preventing price pressures from dissipating quickly.  Despite the dip in inflation, the MAS will likely be on notice monitoring price developments with core inflation still well above target.  

Tokyo sends warning over yen’s deprecation Yen has slumped over 7% against US dollar since April USD/JPY is in positive territory on Monday. In the European session, the yen is trading at 143.15, down 0.36%.   Tokyo issues warning over slumping yen The Japanese yen continues to lose ground and the Japanese government is not amused. The yen slipped 1.26% last week and fell as low as 143.87 on Friday, its lowest level since November 7th. Since the start of April, the yen has plunged over 7% against the dollar. On Monday, Japan’s top currency diplomat, Masota Kanda warned that the yen’s weakening was “rapid and one-sided”. Kanda said he would not rule out any options, including currency intervention. The markets have become accustomed to verbal intervention when the yen drops sharply and these verbal warnings don’t have much effect. The concern is that the government could intervene and purchase yen, as it did in September and October 2022. At that time, the yen was below 151, but Tokyo could decide that it doesn’t want to wait for the yen to fall that low before it intervenes. The Bank of Japan maintained its ultra-loose policy at last week’s meeting, and the divergence between the BoJ and other major central banks keeps hammering at the yen. The US/Japan rate differential has been widening as the Fed has tightened aggressively and is expected to raise rates further in the second half of the year. The BoJ could provide some fast relief to the yen if it raised interest rates, but that doesn’t seem likely anytime soon. A more likely scenario is for the central bank to tweak its yield currency curve control, which sparked a yen rally when the BoJ widened its target band for interest rates. Governor Ueda, who took over in April, has sounded more receptive to tightening policy than his predecessor but so far he has toed the line and maintained a dovish stance. . USD/JPY Technical USD/JPY is testing support at 143.45. The next support level is 142.35 There is resistance at 144.65 and 145.59  

Ueda, Powell participating in panel at ECB Bank Forum Japanese yen slips below 144 US consumer confidence surges higher USD/JPY continues to push higher and is closing in on the 145 line. In the North American session, the yen is trading at 144.60, up 0.37%.   Will Ueda provide any clues at ECB Bank Forum? It’s a quiet day on the data calendar, with no important US releases. In Japan, retail sales are expected to improve to 5.4%, up from 5.0%. Today’s highlight is the ECB Bank Forum in Sintra, with the heads of the major central banks taking part in a panel on policy. Bank of Japan Governor Ueda and Fed Chair Powell will participate and any hints about rate policy could move USD/JPY. The Fed and the BoJ are in very different situations, which could make the ECB event all the more interesting. The Fed is close to its tightening cycle, in which it has raised rates by some 500 points. Fed Chair Powell has hinted at a couple of more rates this year, but if inflation continues to fall, the Fed could start chopping rates early in 2023. The BoJ has maintained its ultra-loose policy, even as all the other major banks have raised rates in order to curb inflation. The BoJ has insisted that inflation is temporary, even though it remains above the Bank’s target of 2%. The BoJ isn’t looking at raising interest rates anytime soon, although it could tweak its yield curve control policy in order to prop up the ailing Japanese yen, which has plunged 3.7% in the month of June.  

FX volatility might be returning given Wall Street is seeing some exhaustion with several key currency trades.  The end of tightening for the advance economies keeps getting delayed and sooner than later it will deliver a major blow to growth.  FX volatility should pick up as diverging policies from the Fed, BOE, and PBOC could trigger some significant moves in H2.   USD/JPY A lot of macro traders were expecting dollar strength to intensify against the Japanese yen as interest rate differentials appear likely to widen further over the next few months.  The carry trade isn’t making a comeback given the rising prospects of a recession coming to the US.  Everyone also remains on intervention watch from Japan’s Ministry of Finance, but expectations are for action if dollar-yen tests the 150 region.  The consensus on Wall Street is that Japan will probably act, but it might not happen until after the summer.  A tweak to yield curve control could trigger yen strength but that won’t happen until the BOJ’s price goal is achieved.  BOJ Governor Ueda has been clear that no tweaks will occur until the prospects heighten for inflation to sustainably reach its 2% target. USD/JPY weakness towards 140 has triggered some buyers and that might gain momentum if risk appetite can remain throughout tomorrow’s US inflation report (Wednesday 830am est).  Further upside could eye a return to the 145 zone if risk aversion does not run wild post both Wednesday’s CPI reading and Friday’s bank earnings.        

USD/JPY has shed -5.4% from its 30 June 2023 high of 145.07, on sight to record its worst weekly loss since 7 November 2022. Today’s intraday sell-off has managed to hold at the 200-day moving average acting as support at 137.65. Short-term momentum has turned positive which increases the odds of a corrective rebound.   This is a follow-up on our prior analysis “USD/JPY Technical: “At risk of a minor bounce before bearish tone resumes” published earlier this week on 11 July 2023. The USD/JPY has tumbled in an almost straight-line fashion on broke below the 138.70 short-term support as highlighted (click here for a recap). The USD/JPY has torpedoed downwards by -5.40% from its recent high of 145.07 printed on 30 June 2023 to today, 14 July Asian session intraday low of 137.24 at this time of the writing. It has challenged the key 200-day moving average and recorded its worse weekly loss since the week of 7 November 2022. Talks of an imminent ultra-dovish monetary policy shift from the Bank of Japan (BoJ) in the upcoming monetary policy decision meeting on 28 July have started to make their rounds again. In today, 13 July Asian session, there are two news flows that advocate a tilt away from negative interest rates in Japan. Firstly, local Japanese media, Yomiuri reported that BoJ is likely to raise its FY 2023 annual inflation forecast to above 2% for its latest quarterly outlook report which is released on the same day as the upcoming 28 July monetary policy decision outcome. Secondly, former BoJ official, Hideo Hayakawa commented that he is expecting another tweak to the yield curve control programme on 28 July with a more aggressive bias of 50 basis points (bps) widening on the band of around 0% on the 10-year Japanese Government Bonds (JGB) yield to 1% from the current level of 0.5%. Previously, BoJ caught markets by surprise by widening the 10-year JGB yield band by 25 bps on 20 December 2022.   Holding at key 200-day moving average   Fig 1:  US/JPY medium-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The current decline in place since 30 June 2023 has reached its 200-day moving average which confluences with a graphical support of 137.65 (former swing high areas of 15 December 2022, 8 March 2023, and 2 May 2023). In addition, today’s price action at this time of the writing has formed an impending bullish daily “Hammer” candlestick pattern which indicates that odds have risen for a potential minor rebound in price actions to retrace the prior five days of steep descent.   Positive short-term momentum has emerged   Fig 2:  US/JPY minor short-term trend as of 14 Jul 2023 (Source: TradingView, click to enlarge chart) The hourly RSI oscillator has flashed out another bullish divergence signal at its oversold region and just staged a bullish breakout above a key parallel descending resistance at the 43 level. These observations suggest the recent downside momentum has abated. Watch the 137.65/40 key medium-term pivotal support for a potential corrective rebound scenario with the next intermediate resistances coming in at 139.00 and 139.70/140.10 (also the 38.2% Fibonacci retracement of the current decline from the 30 June 2023 high to today’s 14 July intraday low of 137.24). On the flip side, a break below 137.40 invalidates the corrective rebound to expose the next support at 135.70/50 (the 61.8% Fibonacci retracement of the prior up move from 24 March 2023 low to 30 June 2023 high).    

EUR/USD excessively overbought? The euro-dollar ascent was mostly a one-way move for most of July.  After inflation eased to the slowest pace in more than two years, the dollar tumbled.  With the Fed entering their blackout period before the July 26th FOMC meeting, the lack of hawkish pushback has allowed the dollar to remain vulnerable to further pain just ahead of the 1.1300 handle.  Bullish momentum has cleared multiple hurdles but the 1.1350 level should prove to be rather strong. While the end of the Fed’s tightening cycle appears to be in place, expectations are shifting that the ECB might not be that far from pausing their rate hiking cycle.  Today’s comment from ECB’s Knot, a well-known hawk, suggested that they could be ready to pause in September and that it might hinge on the inflation data going forward. All eyes will be on the Wednesday’s second reading of euro-area inflation. The EUR/USD daily chart displays a potential bearish butterfly pattern. Point D is targeted with the 1.414 1.414% Fibonacci expansion level of the X to A move and the B to C leg.  If dollar strength emerges here, downside could target the 1.1050 level. If invalidated, bullish momentum could surge above the 1.1300 region, potentially targeting the 1.1450 resistance zone.     USD/JPY dead-cat-bounce or sustainable rally? The plunge for dollar-yen accelerated after last week’s cooler-than-expected inflation report shifted Fed rate hike expectations. The macro backdrop has mostly seen investors calling for pain for the Japanese yen since 2021.  Hedge funds ramped up bearish yen bets(according to the COT report for the week through July 11th), taking their net short positions to the largest level since last May. Now the focus also includes the BOJ, which includes some disappointment with keeping the BOJ keeping Yield Curve Control intact. Yen volatility could remain excessive if the Fed signals more tightening might need to be done after the July 26th FOMC meeting and if BOJ doesn’t tweak their policy. Over the next couple of weeks, it seems that the yen rally will either cool towards 141.50 (a temporary recovery) or we will see it surge below 136.00 (the downtrend remains in place).        

The Bank of Japan meeting could be a close call, while Bank Indonesia is likely to extend its pause. Meanwhile, Korea reports GDP figures and Singapore reports inflation Australia's second quarter CPI data are a key variable for the central bank The highlight for the week will be the second quarter CPI release in Australia on Wednesday. The inflation outlook will help determine whether the Reserve Bank of Australia (RBA) hikes rates again in the second half of the year. The unemployment data released earlier today showed that the unemployment in June stood at 3.5%, slightly lower than the consensus of 3.6%. The improvement in the labour market could point to solid economic activity despite the recent string of tightening. As such, CPI for the second quarter is likely to remain elevated but lower compared to the first quarter. Taiwan's industrial output to continue decline Given the poor performance of China’s second-quarter data, industrial output in export-reliant Taiwan is likely to have remained in contraction last month. Semiconductor production plays an integral role in Taiwan’s industrial output. A report released by TrendForce recently showed that global foundry sales will decrease by 4% year-on-year in 2023, with many major firms suggesting no significant rebound in orders. Korea’s GDP to pickup Korea’s GDP growth in the second quarter is expected to accelerate to 0.5% quarter-on-quarter seasonally-adjusted compared to the first quarter’s 0.3%. The improvement in net export contributions is likely to have driven overall growth on the back of a sharp decline in imports, while private consumption growth will probably remain flat. Monthly activity data should stay soft with construction and service activity declining in June. BoJ meeting to be a close call? The Bank of Japan (BoJ) will meet on Friday and we believe that recent swings in the FX and Japanese government bond markets reflect market expectations for policy adjustment. It is a close call, but we still think yield curve control (YCC) tweaks are possible, given that recent data support steady inflation growth and a sustained economic recovery. BI expected to pause Bank Indonesia (BI) is set to extend its pause, keeping policy rates at 5.75%. Inflation has returned to target but pressure on the Indonesian rupiah (IDR) of late may give Governor Perry Warjiyo reason to keep rates steady. We expect BI to stay on hold for a couple more meetings and only consider a potential rate cut once the IDR stabilises. Singapore inflation to slow Favourable base effects and moderating commodity prices could help both headline and core inflation dip in Singapore. Headline inflation may edge lower to 4.6% YoY with core inflation also expected to slow. The Monetary Authority of Singapore will be weighing the upside GDP growth surprise alongside the improving price outlook for its meeting later this year.   Key events in Asia next week    

USD/JPY  Yen dives on reports BOJ sees little need to adjust YCC   Central bank-a-palooza was supposed to start next week, but traders got a head start after reports surfaced that the BOJ saw little urgency to adjust their yield curve control program (YCC).  It looks like FX traders are expecting the BOJ to maintain their ultra-loose monetary policy and for the Fed to deliver a quarter-point rate rise and to have a wait-and-see approach about the September meeting.  The Japanese yen is the weakest major currency and that could remain the case if risk appetite remains healthy.  It seems that while the BOJ stands pat, the other major central banks are tightening and that should continue to drive that interest rate differential trade. Soft landing hopes are not getting derailed by earnings season so far, in fact market breadth in the stock market continues to improve which could help keep the rally going strong.   Initial Rate Decision Expectations The Fed will raise rates by 25bps and likely signal a wait-and-see approach for the September meeting (saving that decision for the end of August at Jackson Hole). Analysts are unanimously expecting the ECB to raise all three key rates by 25bps but are unsure what will happen in September The BOJ is expected to keep rates steady, no change to YCC, and revise up its inflation forecasts for this year alone.     Soft stochastics suggest euro pullback       The EUR/USD weekly chart shows a bearish bias could be emerging as the slow stochastics overbought conditions is seeing a tentative drop below the 200-week SMA.  If bearish momentum accelerates key support will come from the 1.1080 level, with major support eyeing the heavily tested 1.1030 price level.  Intraday resistance resides at the 1.1150 level, with major resistance be provided by the psychological 1.1200 handle.   Nasdaq Friday Volatility The Nasdaq could see excessive volatility at the close as a special rebalancing will address overconcentration in the index by redistributing the weights.  In addition to this special rebalancing, traders will have to deal with options expiration. Three mega-cap tech giants (Apple, Nvidia and Microsoft) make up almost 30% of the weight in the fund, which is not diverse enough for a key index.  Some profit-taking might occur ahead of busy next week that contains handful of market moving events that include three big rate decision, several key earnings, and key GDP, ECI , and PCE data.  

Russia No major economic releases or events next week. Industrial output and central bank reserves are the only items on the agenda. South Africa The SARB paused its tightening cycle in July while stressing it is not the end – although it likely is as both headline and core inflation are now comfortably within its 3-6% target range – and that future decisions will be driven by the data. With that in mind, next week is looking a little quiet with the leading indicator on Tuesday and PPI figures on Thursday. Turkey Next week offers mostly tier three data, with the only release of note being the quarterly inflation report. Against the backdrop of a plunging currency and a central bank that finally accepts it needs to raise rates but refuses to do so at the pace required, it should make for interesting reading. Though it likely won’t do anything to restore trust and confidence in policymakers to fix the problems. Switzerland Next week consists of just a couple of surveys, the KOF indicator and investor sentiment. China No key economic data but keep a lookout for a possible announcement of more detailed fiscal stimulus measures in terms of monetary amount, and scope of coverage. Last week, China’s top policymakers announced a slew of broad-based plans to boost consumer spending and support for private companies in share listings, bond sales, and overseas expansion but lacking in detail. India No major key data releases. Australia Several pieces of data to digest. Firstly, flash Manufacturing and Services PMIs for July out on Monday. Forecasts are expecting a further deterioration for both; a decline in Manufacturing PMI to 47.6 from 48.2 in June, and Services PMI slip to contraction mode at 49.2 from June’s reading of 50.3. Secondly, the all-important Q2 inflation data out on Wednesday where the consensus is expecting a slow down to 6.2% year-on-year from 7% y/y printed in Q1. Even the expectation for the less volatile RBA-trimmed median CPI released on the same day is being lowered to 6% y/y for Q2 from 6.6% y/y in Q1. These latest inflationary data will play a significant contribution in shaping the expectations of the monetary policy decision outlook for the next RBA meeting on 1 August. Based on the RBA Rate Indicator as of 21st July, the ASX 30-day interbank cash rate futures for the August 2023 contract have priced in a 48% probability of a 25-bps hike to bring the cash rate to 4.35%, that’s an increase in odds from 29% seen in a week ago. Lastly, retail sales for June out on Friday where the forecast is expected a decline to -0.3% month-on-month from 0.7% m/m in May. New Zealand One key data to note will be the Balance of Trade for June out on Monday where May’s trade surplus is being forecasted to reverse to a deficit of -NZ$1 billion from NZ$ 46 million. Japan On Monday, we will have the flash Manufacturing and Services PMI for July. The growth in the manufacturing sector is expected to improve slightly to 50 from 49.8 in June while growth in the services sector is forecasted to slip slightly to 53.4 from 54.0 in June. Next up, on Friday, the leading Tokyo CPI data for July will be released. Consensus for the core Tokyo inflation (excluding fresh food) is expected to slip to 2.9% year-on-year from 3.2% y/y in June, and Core-Core Tokyo inflation (excluding fresh food & energy) is forecasted to dip slightly to 2.2% y/y from 2.3% y/y in June. Also, BoJ’s monetary policy decision and latest economic quarterly outlook will be out on Friday as well. The consensus is an upgrade of the FY 2023 inflation outlook to be above 2% and a Reuters report out on Friday, 21 July stated that it is likely no change to the current band limits of the “Yield Curve Control” (YCC) programme on the 10-year JGB yield based on five sources familiar with the BoJ’s thinking. Prior to this Reuters news flow, there is a certain degree of speculation in the market place the BoJ may increase the upper limit of the YCC to 0.75% from 0.50%. Singapore Two key data to watch out for. Firstly, inflation for June is out on Monday. Consensus is expecting core inflation to cool down to 4.2% year-on-year from 4.7% y/y in May. If it turns out as expected, it will be the second consecutive month of a slowdown in inflationary pressure. Next up, industrial production for June out on Wednesday, another month of negative growth is expected at -7.5% year-on-year but at a slower magnitude than -10.8% y/y recorded in May.  

Gold prices are softening as the dollar firms up after reports that the BOJ is leaning towards leaving yield curve control strategy unchanged. ​   The dollar is riding a small wave here and that is putting gold’s third weekly gain at risk. ​ Gold traders have a lot of news to follow next week and that could support a deeper pullback if the Fed keeps optionality for more tightening on the table and if earnings continue to mostly suggest the resilience of the US economy remains. Before the central bank fireworks ignite next week, gold seems like it will consolidate between the $1940 and $1980 range. ​ ​ ​      

USD/JPY       Dollar-yen has entered its pre-FOMC/BOJ consolidation range.  Heading into the FOMC decision the data has been holding up.  The US economy has still yet to feel the complete impact of the Fed’s rate hiking campaign as the flash PMIs showed that business activity is slowing and as consumer confidence surged to a two-year high.  Wall Street wants to believe the Fed will be one and done, but the data might not allow that to happen.  They are likely to signal an extended pause, but hold onto a tightening bias, which could help push dollar-yen higher initially.  Will USD/JPY rise towards prior intervention levels around the 145 is the big question at hand.  A short-term advance in the dollar seems possible going into and that could extend post Fed if policymakers focus on the resilience of the US economy. The bigger driver for USD/JPY might stem from the BOJ decision.  There was a chance that we could get a Yield Curve Control (YCC) tweak, but that seems less likely.  A key Tokyo CPI report will occur hours before the BOJ decision, but probably won’t sway the bank unless it comes scorching hot.  The BOJ should deliver a tweak, but Ueda’s comments from a conference in India last week suggest they will stay the course with their ultra-loose monetary stance.  The BOJ might eventually need to trigger an abrupt change to policy given the trajectory of the US economy and how high inflation has turned. To the downside, a break of the 140 level could see momentum selling target the 137.50 region.  The 142.50 level should provide initial resistance, with the 145 level likely to trigger calls of future currency intervention.  

Yen moves higher as Bank of Japan tweaks YCC By Michael Hewson (Chief Market Analyst at CMC Markets UK) European markets saw a strong session yesterday, buoyed by the belief that the central banks could be done when it comes to further rate hikes, after the ECB followed the Fed by raising rates by 25bps and then suggesting that a pause might be on the table when they next meet in September. The mood was also helped by a strong set of US economic numbers which pointed to a goldilocks scenario for the US economy.     US markets also opened strongly with the S&P500 pushing above the 4,600 level and its highest level since March 2022, before retreating and closing sharply lower, with the Dow closing lower, breaking a run of 13 days of gains. Sentiment abruptly changed during the US session on reports that the Bank of Japan might look at a possible "tweak" to its yield curve control policy at its latest policy meeting earlier this morning.     This report, coming only hours before today's scheduled meeting, caught markets on the hop somewhat pushing the Japanese yen higher against the US dollar, while pushing US 10-year yields back above 4%. With Japanese core inflation above 4% there was always the possibility that the Bank of Japan might spring a surprise, or at least lay the groundwork for a possible tweak. The Bank of Japan has form for when it comes to wrong footing the market, and so it has proved, as at today's meeting they announced that they would allow the upper limit on the 10-year yield to move from 0.5% to 1%. They would do this by offering to purchase JGBs at 1% every day through fixed rate operations, effectively raising the current cap by 50bps, and sending the yen sharply higher. The central bank also raised its 2023 inflation forecast to 2.5% from 1.8%, while nudging its 2024 forecast lower to 1.9%.     As far as today's price action is concerned, the late decline in the US looks set to translate into a weaker European open, even though confidence is growing that the Fed is more or less done when it comes to its rate hiking cycle. Nonetheless, investors will be looking for further evidence of this with the latest core PCE deflator, as well as personal spending and income data for June, later this afternoon to support the idea of weaker inflation. Anything other than a PCE Core Deflator slowdown to 4.2% from 4.6%, could keep the prospect of a 25bps September hike on the table for a few weeks more. Both personal spending and income data are expected to improve to 0.4% and 0.5% respectively.     We're also expecting a tidal wave of European GDP and inflation numbers, which are expected to confirm a weaker economic performance than was the case in Q1, starting with France Q2 GDP which is expected to slow to 0.1% from 0.2%. The Spanish economy is also expected to slow from 0.6% to 0.4% in Q2. On the inflation front we'll be getting an early look at the latest inflation numbers for June from France and Germany as well as PPI numbers for Italy. France flash CPI for June is expected to slow to 5.1% from 5.3%, while Germany CPI is expected to slow to 6.6% from 6.8%. With PPI inflation acting as a leading indicator for weaker inflation for all of this year the latest Italy PPI numbers will be scrutinised for further weakness in the wake of a decline of -3.1% in May on a month-on-month basis and a -6.8% decline on a year-on-year basis.       EUR/USD – failed to follow through above the 1.1120 area, subsequently slipping back, falling below the 1.1000 area, which could see a retest of the 1.0850 area which is the lows of the last 2 weeks. Below 1.0850 targets a move back to the June lows at 1.0660.   GBP/USD – slipped back from the 1.3000 area, falling back below the Monday lows with the risk we could retest the 50-day SMA and trend line support at the 1.2710. While above this key support the uptrend from the March lows remains intact.       EUR/GBP – struggling to rally, with resistance at the 0.8600 area, and support at the recent lows at 0.8500/10. Above the 0.8600 area targets the highs last week at 0.8700/10.   USD/JPY – while below the 142.00 area, the bias remains for a move lower, with the move below 139.70 targeting a potential move towards the 200-day SMA at 137.20.   FTSE100 is expected to open 24 points lower at 7,668   DAX is expected to open 38 points lower at 16,368   CAC40 is expected to open 20 points lower at 7,445

Asia Morning Bites Expectations for a tweak to the Bank of Japan's (BoJ) yield curve control (YCC) policy rise as Tokyo inflation remains high in July.   Global Macro and Markets Global markets:  The main market development yesterday stemmed from the more dovish commentary from the ECB, which in contrast to the attempt by Jay Powell the previous day to keep thoughts of tightening alive, seemed to suggest that this may be the peak in Europe. EURUSD dropped to 1.0978, and this pulled most other G-10 with it, helped also by stronger-than-expected GDP figures out of the US that dampened thoughts of rate cuts next year. The AUD dropped to 0.6709, Cable fell to 1.2794. But the JPY, bucked this trend, with possible tweaks to the yield curve control program at today’s Bank of Japan (BoJ) meeting (see also below), the JPY has strengthened to 139.271. The MYR and THB also made some decent gains yesterday, but the CNY weakened 0.34% to 7.1675 as optimism about stimulus measures continued to fade. Bond markets saw the spread of US yields widen over European yields. Germany’s 2Y govt yields fell 5.2bp yesterday to 3.033%, while US 2Y Treasury yields rose 7.7bp to 4.928%. And there was a large rise in US 10Y yields too, which pushed up 13.1bp to just under 4% and briefly traded above the 4% level. The equivalent German bond yield fell 1bp to 2.467%. Equities did not like the prospect that rates in the US may stay elevated thanks to rising prospects of a soft landing. Here, a bit of bad news might actually go down better than continued macro resilience. Both the S&P 500 and NASDAQ dropped by 0.64% and 0.55% respectively. Chinese stocks were mixed. The Hang Seng made a decent gain of 1.41%, but the CSI 300 lost 0.13% on the day. G-7 macro:  There was no shortage of macro excitement yesterday - first the ECB meeting which is covered by our European team here. Europe’s main policy rate is now 3.75%, which remains well below inflation, so on some measures, is barely even restrictive, and one of the reasons why our Eurozone economists don’t believe the ECB is done with hikes just yet. Christine Lagarde may not have shut the door to further hikes, but she has undoubtedly opened one to possible pauses should that be deemed appropriate by the run of data. One other tweak to their policy was to reduce the remuneration of minimum reserves to zero. The 2.4% annualized GDP growth rate from the US was also a surprise yesterday. The consumer spending figures did slow from 1Q23, but at 1.6%, were better than had been forecast. And the continued signs of slowing inflation were evident in the decline in the PCE deflator’s annualized growth rate to 3.8% from 4.9%. James Knightley describes this “Goldilocks: release here.    Japan: Tokyo inflation stayed at 3.2% YoY in July for a third month, which was higher than the market consensus of 2.9%. Even more surprising is that core inflation, excluding fresh food and energy, actually rose to 4.0% YoY (vs 3.8% in June, 3.7% market consensus). This shows that, unlike other major economies, Japan’s inflation hasn’t yet reached its peak. The only item to fall was utilities (-10.8%) thanks to the continued energy subsidy program. On a monthly comparison, inflation accelerated 0.3% MoM sa in July (vs 0.2% in June) and we saw a pickup in service prices of 0.4% while goods prices continued to rise 0.2%.  Headline inflation will continue to go down slowly due to base effects and falling global commodity prices, but core inflation will remain high for a considerable time. The BoJ is set to announce its policy decision in a few hours later today following this inflation surprise. We expect the BoJ to leave its policy rates unchanged, but we think there is a good chance of a YCC policy change at today’s meeting, which is a non-consensus view - the market believes that October is more likely. If the BoJ seeks to normalize its policy in the future, we think that delaying a YCC policy adjustment will create a larger burden for them. For a more detailed view of BoJ policy, please see here. The BoJ will also release its quarterly macro outlook today, and the focus will be the inflation outlook for 2024. We think that this is how the BoJ will assess the sustainability of inflation in this cycle and will be a good indicator against which to estimate the timing of the BoJ’s first rate hike move. South Korea:  Industrial production fell -1.0% MoM sa in June (vs revised 3.0% in May and -0.9% market consensus). Semiconductor output has now increased for four months in a row which is quite different from the industry’s reduction plan, and inventory data suggest that high-value chip output may have increased while general chip production slid. Also, shipments of semiconductors rose 41.1%. We believe that the chip cycle is bottoming out slowly. Meanwhile, vehicle output dropped quite sharply -12.9% but after having risen solidly for the previous three months, it seems likely that the auto sector is taking a breather for the time being. Forward-looking investment data were soft, which suggests that investment in the current quarter will continue to contract.   What to look out for: The BoJ and US core PCE Japan BoJ policy (28 July) Australia PPI (28 July) US personal spending, core PCE, University of Michigan sentiment (28 July)

FX Daily: Diverging G3 trends dominate Closing the week, we have the Japanese yen a little stronger as the BoJ softens up YCC control, the dollar is steady-to-stronger on good US activity data, and the euro is weaker as the ECB throws a September rate hike into doubt. After the BoJ press conference, today's highlight will be the US Employment Cost Index data. A soft number could hit the dollar.   USD: The ECI will be in focus today The combination of some stronger US activity data and some independent euro weakness on the back of yesterday's ECB meeting has seen the trade-weighted DXY dollar push a little higher. DXY would be even higher were it not for the lower USD/JPY we have seen today on the back of the Bank of Japan's tweak to its Yield Curve Control (YCC) target.  Regarding the BoJ, we think the market is right to have taken USD/JPY a little lower after this surprise adjustment to how it manages its 10-year Japanese government bond (JGB) yield target. What has probably prevented USD/JPY from dropping harder are the new BoJ core CPI forecasts, where FY24 and FY25 CPI are still only forecast at 1.9% (April forecast 2.0%) and 1.6% (1.6%) respectively. This hardly provides a firm foundation to conclude that CPI will now sustainably run near 2.0%. Instead, the tweak to the YCC programme may reflect BoJ Governor Kazuo Ueda's preference to take baby steps away from the heavy control of the JGB market - i.e. maybe he's more of a free marketeer.  However, we do think the drop in USD/JPY might get some support from the dollar side today. Undoubtedly, US activity data has been holding up well, and based purely on the activity data alone one would argue that the Fed had the strongest case for another rate hike, yet Fed Chair Jerome Powell acknowledges that US monetary policy is already in restrictive territory and the focus is on disinflation.  On Wednesday, Powell said there would be important data prints before the September FOMC meeting – two CPI prints, two jobs reports and the Employment Cost Index (ECI). Well the second-quarter ECI figure is released today and is expected at 1.1% – a drop from 1.2% in the first quarter and a peak of 1.4% in the first quarter of 2022. My colleague James Knightley thinks the risks are skewed to a sub-consensus 1.0% reading today given the softer average hourly earnings and survey evidence both from the Fed's Beige Book as well as the NFIB data that the US labour market is coming better into balance. A soft ECI number can wipe out the final 8bp that is priced for the US tightening cycle this year and will probably knock the dollar 0.5-1.0% lower. This would be a good story for risk assets, where both the Fed and seemingly the ECB would be closer to ending tightening cycles. If we are right with our call on the ECI, DXY could head back to yesterday's low near 100.50.

BoJ Summary of Opinions takes note of higher inflation US job report a mixed bag The Japanese yen has started the week in negative territory. In the European session, USD/JPY is trading at 142.36, up 0.42%. BoJ says monetary easing to continue Inflation continues to be a key issue for the Bank of Japan, although it is much lower than in other major economies, at around 3%. Still, inflation is above the Bank’s 2% target and this continues to raise speculation that the BoJ will have to tighten policy sooner or later. The BoJ has pushed back against talk that it will tighten, and when the central bank recently made its yield curve control (YCC) more flexible, Governor Ueda was careful to stress that the step did not represent a move towards normalization. Against this backdrop, the BoJ released its Summary of Opinions earlier today. The members reiterated the necessity to keep an ultra-easy monetary policy in place, but some members noted that inflation and wages could continue to increase. One opinion went as far as to state that 2% inflation “in a sustainable and stable manner seems to have clearly come in sight” and urged the BoJ to make YCC more flexible. This BoJ internal conversation could be a signal that policy makers are slowly acknowledging that inflation, which has been above the 2% target for months, may be sustainable. That would mark a sea change in the BoJ’s thinking and could have major ramifications on the exchange rate. The US employment report for July was a mix. Nonfarm payrolls were soft at 187,000, despite a banner ADP release which fuelled expectations of a breakout nonfarm payrolls release. Job growth is slowing, but the unemployment rate ticked lower to 3.5% down from 3.6%, and wage growth stayed steady at 4.4%.  

30-year Treasury yield rose 12bps to 4.645% vs 15.19% which was the peak at 1981. Bloomberg dollar index has best rally in three weeks, which is also highest level since December BOJ Governor Ueda stands on dovish ground, yen free to fall; PM Kishida delivers plan to ease inflation pain Bank of Japan Governor Kazuo Ueda and his deputy governor Uchida are committed to their ultra-easy policy.  Governor Ueda noted that there was “very high uncertainty” over whether companies would continue to increase prices and wages.  Uchida stated that the central bank needs to patiently continue monetary easing.  He also reiterated that they are closely watching FX markets. Japan’s Prime Minister Kishida also unveiled new economic measures that should help deliver sustainable wage growth.  Kishida expressed his unhappiness with the yen, noting that excessive currency moves are not desirable and that he wants to monitor markets with vigilance. The pressure to stop the yen’s slide is building and the current move in Treasuries makes dollar strength likely to remain intact. USD/JPY Daily Chart     As of late March, the US dollar continues to assert renewed strength as a a result, USD/JPY has retested prior levels that  triggered intervention last year.  The path to 150 seems like it should be there given the major reset Wall Street is having with pricing in higher-for-longer. Everyone wants to know when does Japan step in and support the yen, or can they just ditch their easy policy?  Excessively overbought territory could last a while longer, but it seems  150 to 155 will remain key levels. Next months inflation report should include some upward revisions, which should mean traders might become more optimistic about a policy shift or the abandoning of yield curve control.  Yen weakness might last a little while longer, but FX traders are anxious for when Japan is ready to make a meaningful policy change.  

EU GDP expected to stall in Q3 , BOJ tweaks YCC  By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets managed to get off to a positive start to the week yesterday, helped in no small part by the limited and incremental nature of the Israeli incursions into Gaza which appears to be helping assuage concerns that the escalations might prompt another front opening on Israel's northern border with Lebanon and Hezbollah. US markets also got off to a strong start with the Dow posting its biggest one-day gain since July, while the Nasdaq 100 and S&P500 both rose by more than 1%, while oil prices closed at their lowest level in over 2 weeks. While yesterday's rebound was welcome it isn't likely to change the fact that US stocks look set to close their 3rd successive monthly decline.     Yesterday the Japanese yen pushed higher on a report from Nikkei that the Bank of Japan was set to move the bands when it comes to its yield curve control policy. This morning we found out how true that story was when the Bank of Japan, while keeping rates unchanged, did just that, pushing the upper boundary to 1% which was less hawkish than markets had been expecting, given they had already been targeting that level when it came to their bond buying operations.     In moving the band, they have merely removed the discrepancy between the YCC rate and their bond buying levels, disappointing the markets who had been expecting something a little more radical, like pushing the band beyond 1%. In not being more hawkish the Japanese yen tumbled and slid back through the 150.00 level. At the same time, the BoJ raised their inflation forecasts for 2023 to 2.8, and for 2024 to 2.8%.   Despite yesterday's strong US session markets here in Europe look set to open slightly lower as we head into the final trading day of October and look ahead to tomorrow's Federal Reserve rate meeting as well as a tsunami of US economic data this week, we'll also be getting an insight into how the economy in Europe has fared over the last 3 months.     Yesterday we found out that theGerman economy contracted by -0.1% in Q3, while also slipping into disinflation in October, raising the question as to how far behind the rest of Europe might be in that regard.     The French economy is expected to have slowed from 0.5% in Q2 to 0.1% in Q3, with a similar slowdown expected to be seen in the Italian economy, which is also expected to have slowed to 0.1%.   On the wider EU measure the economy is expected to have slowed to 0% in Q3 from 0.1%, meaning that over the last 4 quarters we've seen little to no growth at all. Inflation is also expected to have slowed sharply with French CPI for October expected to have slowed to 4.5% from 5.7% on an annualised basis. EU flash CPI is expected to have similarly slowed from 4.3% to 3.1%, with core prices forecast to remain a little stickier at 4.2%, down from 4.5%.     Given the weakness seen in these figures there is rising concern that the ECB may have erred when it raised rates by another 25bps in September. They certainly ought to offer some pause for thought to the German hawks on the governing council who probably still feel that more needs to be done, when it comes to further rate hikes. In the US we have the latest Chicago PMI as well as October consumer confidence, neither of which are expected to show much in the way of resilience. Consumer confidence is expected to slow to 100.5 from 103, while Chicago PMI is forecast to edge higher to 45, from 44.1.               EUR/USD – continues to rally off the 1.0520 lows of last week, with the next support at the recent lows at 1.0450. Resistance at the 1.0700 area and 50-day SMA.    GBP/USD – continues to rally off the lows of last week at the 1.2070 area last week. Major support remains at the October lows just above 1.2030. Below 1.2000 targets the 1.1800 area. Resistance at 1.2300.   EUR/GBP – retested the 0.8740 area yesterday, before slipping back. We need to see a break above 0.8750 to target the 0.8800 area. A move below 0.8680 and the 200-day SMA targets the 0.8620 area.   USD/JPY – retreated from the 150.78 area at the end of last week, slipping back to the 148.75 area and the lows from 2-weeks ago. Below 148.70 targets the 147.30 area. Still on course for a potential move towards 152.20, while above the 148.75 area.   FTSE100 is expected to open 10 points lower at 7,317   DAX is expected to open 20 points lower at 14,696   CAC40 is expected to open 5 points lower at 6,820  

JPY: Ueda disappoints markets, but April hike on the table The Bank of Japan kept rates unchanged today as widely expected, but disappointed market hawkish expectations. The Bank kept its dovish guidance unchanged (“take additional monetary easing steps without hesitation if needed") which forced markets to abandon speculation of a rate hike in January.   The yen took a hit, falling almost by 1.0% against the dollar after the announcement and press conference by Governor Ueda, but we identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April. From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24.   ⚠️ Did the #BOJ fall asleep on the $JPY 🖨️ print button or what? 🤭Almost makes you wonder if someone out there is in desperate need of liquidity… 🤔 https://t.co/EdRfXb9vUH pic.twitter.com/z2dN3YVtuH — JustDario 🏊‍♂️ (@DarioCpx) December 19, 2023

Japan Data Brief : What you may have missed over the year-end holiday After an unexpected contraction in 3Q23, the economy appears to have recovered modestly. Inflation slowed due to base effects while the monthly activity outcomes were a bit mixed. We don't expect an imminent Bank of Japan rate hike but it may still terminate the yield curve control programme in the first quarter as JGB market conditions remain supportive. Summary The monthly activity data was mixed. Industrial production was softer than expected, but the rebound in retail sales was stronger than expected. As Japan's main growth engines are consumption and services, we expect fourth quarter 2023 GDP to rebound despite soft manufacturing activity. Inflation has also came down sharply, which should support the BoJ's dovish stance for now. We believe that the BoJ is preparing for its first rate hike in the second quarter, when the government's stimulus will be supporting growth while another big jump in wage growth is achievable throughout the spring wage negotiation season. Meanwhile, the yield curve steepened from November when the BoJ decided to discontinue its daily fixed-rate purchase operations but the 10Y Japanese government bond (JGB) yields were below the 0.6% level at the end of last year. We think the Bank of Japan is likely to terminate its yield curve control programme in January as market pressures should be off thanks to the global bond market rally and JGB yields have been below the BoJ's hinted proper 10Y level of 0.8%. Also, a new quarterly outlook report could justify the BoJ's policy changes by raising its inflation outlook for FY 2024 and 2025.  Industrial production declined but only marginally so Industrial production fell -0.9% month-on-month seasonally adjusted in November (vs 1.3% in October, -1.6% market consensus), mainly led by poor vehicles outcomes (-1.7%). There were temporary shutdowns of factories due to shortages of some auto parts. Thus, we expect a rebound in December as production lines returned to normal. We found a rebound in chip-producing equipment (7.2%) is likely to continue. Japan is not a major semiconductor production hub, but is one of the major players in the chip-making equipment industry. Together with upbeat outcomes from South Korea's chip production and exports, we believe the global semiconductor cycle is on a recovery path.  Retail sales rebounded more than expected in November Retail sales rose 1.0% MoM sa in November (vs -1.7% in October, 0.5% market consensus). The rebound was stronger than expected, but it couldn't fully offset the previous month's decline. But in a positive note, retail sales rebounded in most of the major categories, except food and beverages (-0.8%), signalling the consumption recovery was widespread

FX Daily: Central bank meetings and US GDP in focus FX markets start the week in quiet fashion. The highlight this week will be central bank meetings in many parts of the world, including Japan and the eurozone. No major changes are expected in developed market monetary policy, but decent fourth quarter US GDP data could see US interest rates back up a little further, keeping the dollar supported.   USD: Dollar can stay supported The dollar looks to be trading in a supported fashion. This year's backup in short-term rates has reined in some of the pro-risk sentiment that dominated markets late last year. This backup in rates has largely been driven by central bankers saying they are in no rush to cut rates. After the informal commentary seen over recent weeks, this week will start to see the formal communication as central banks meet in Japan (Tuesday), Canada (Wednesday), and the eurozone and Norway (Thursday). Like many, we think the earthquake in Japan makes it too early for the Bank of Japan (BoJ) to unwind its Yield Curve Control this week. In fact, there have been surprisingly few source stories ahead of this particular meeting, even though we will see a crucial set of new forecasts for prices and activity. Assuming the BoJ springs no surprise, USD/JPY should continue to hover around 148. For the dollar this week, our macro team forecasts above-consensus fourth quarter GDP on Thursday. This could see the market further pare back Federal Reserve easing expectations this year. The market currently attaches a 43% chance of a cut in March and an easing cycle this year now worth 115bp. An interesting aside. Some US banks are proponents of the March Fed cut because the Fed will probably not be renewing its Bank Term Funding Programme in early March. Currently, it seems that some US banks are using the facility to borrow cheaply (4.87% p.a.) and park money at the Fed (5.30%). The thinking goes that a rate cut in March could smooth funding conditions for the regional banks. We do not subscribe to this view and maintain a call for the first rate cut in May. Beyond the US GDP data this week, Friday sees December personal consumption data, where the deflator is again seen at 0.2% month-on-month. This could deliver a benign end to the week. In all, we would say it looks like a range-bound week for the dollar where DXY could trade out something like a 103-104 range. That will continue to see the market interested in carry, and we note that the Turkish lira and the Indian rupee have still managed to deliver year-to-date total positive returns against the dollar – in a broadly bid dollar environment.

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.