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Bank Of Japan Demonstrates Resolve, Riksbank Surprises

Published 04/28/2022, 06:09 AM
Updated 07/09/2023, 06:31 AM
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The BOJ underscored its commitment to capping the 10-year yield at 0.25% and sent the yen reeling. The dollar rose to JPY131, a new 20-year high.

Sweden's Riksbank caught many wrongfooted with a 25 bp hike to initiate the tightening cycle. The krona shot up and was the strongest of the major currencies, rising about 0.65% against the US dollar. Most of the other currencies were =/- 0.25% against the greenback. The euro briefly traded below $1.05 in late Asia.

Better than expected results for Meta Platforms (NASDAQ:FB) helped lift Asia Pacific equities. Of the large markets in the region, only Taiwan and China failed to rise by more than 1% today.

The Chinese yuan was the weakest among the emerging market currencies, sliding about 0.75%, which put the greenback above CNY6.60 for the first time since November 2020. Europe's Stoxx 600 gapped slightly higher at the open and its gains were being led by tech, energy, consumer discretionary, and financials (also helped by favorable earnings).

The US 10-year yield was little changed near 2.82%. The drop in the yen appeared to have no impact. European yields were mostly 1-2 bp higher. Gold was sold to a new two-month low near $1872, but steadied in the European morning and was a little higher on the day. June WTI continued to consolidate. It had not been above $103 this week and for the second session was finding support around $100.

US natgas prices were struggling to extend the roughly 11% gain over the past three sessions, while Europe's benchmark was off almost 4.4% after rallying almost 17% in the past two sessions.

Iron ore rose for a third session, but it still had not recouped Monday's 9.5% drop. Note that China announced it would remove tariffs on coal (3%-6%) to ensure adequate energy supplies. Copper was little changed. July wheat was trading higher and recouped yesterday's 0.35% decline. 

Asia Pacific

The Bank of Japan did not back down an inch, and instead reinforced its message. The coming rise in inflation was not going to be sustainable and the economy still needed robust monetary support.

A weaker yen was overall beneficial but too quick of a pace could hurt companies. The BOJ was standing ready to buy an unlimited about of 10-year Japanese government bonds to defend the 0.25% cap on 10-year yields indefinitely.

As expected, the BOJ raised this year's inflation forecast to 1.9% from 1.1% and left the next two year's forecasts unchanged at 1.1%. It also reduced this year's growth forecast to 2.9% from 3.8% but lifted next year's projections to 1.9% from 1.1%.

Separately, Japan reported weaker-than-expected March industrial output. The earthquake last month disrupted output and a 0.3% gain was recorded after a 2.0% rise in February. On the other hand, March retail sales were stronger than expected, rising 0.9%, not the 0.3% that the median in Bloomberg's survey anticipated.

Meanwhile, according to the weekly MOF portfolio report, Japanese investors continued the campaign that goes back to the second half of October of selling foreign bonds. In those subsequent 29 weeks, Japanese have sold foreign bonds in all but eight weeks.

The monthly breakdown that was included in the current account report, it did not appear that US Treasuries were being singled out, but rather a bear market in global bonds seemed to be the main consideration. And at this point, indirect bidders, where foreign demand was recorded, at US auctions, continued to be strong.

After forging a down sloping pennant formation (bullish) against the yen for the past several sessions, the dollar surged higher today. It reached JPY131 in the European morning on the apparent greenlight from the BOJ. It was the highest level since May 2002. In 2002, the dollar peaked slightly above JPY135. That was the next important level. We suspect that the JPY129.50-JPY130.00 area now will provide support.

The Australian dollar fell to new two-month lows near $0.7075 before finding bids that lifted it back toward $0.7160. It was consolidating the recovery in the European morning. It needed to remain above $0.7100 to give hope that a low was in place. After the higher Q1 CPI figures earlier this week, many were looking for the Reserve Bank of Australia to hike rates next week.

If the PBOC cut reserve requirements on foreign currencies to signal the desire for a slower yuan descent, it did not work. The yuan lurched lower today. It may have fallen partly in sympathy with the yen, but the COVID response weighed on sentiment and undermined the attractiveness of Chinese assets.

Many banks have slashed their yuan forecasts. The PBOC set the dollar's reference rate at CNY6.5628. The median in Bloomberg's survey was CNY6.5664. The lower dollar fix may also be a signal that market forces were driving the move.

The dollar gapped higher and has not looked back. It was trading above CNY6.61. There was some talk about a return to CNY7.0 but that seemed particularly aggressive. We suspected that the CNY6.70-CNY6.72 area may be the next target.

Europe

Like the Reserve Bank of Australia, Sweden's Riksbank resisted pressures to raise rates. As recently as February, Governor Ingves was talking about the first hike in 2024. However, he softened his stance recently in light of the stronger price pressures and today it lifted the repo rate by 25 bp.

Moreover, the Riksbank signaled that the repo rate will be hiked 2-3 more times this year. Lastly, the central bank also announced it will slow the pace of asset purchases in H2 so that the balance sheet begins shrinking. Bill purchases end as of today.

Spain was the first eurozone member to report April CPI. The harmonized measure slipped 0.2% to bring the year-over-year rate to 8.3% from 9.8%.

The Bloomberg survey had found a median projection of a 0.4% gain on the month and a 9.0% year-over-year pace. Yet within the silver lining was a cloud. The core rate rose to 4.4% from 3.4%.

Several German states reported their inflation figures and the national figures were due shortly. The state figures were not directly comparable with the harmonized national measure, but of the five states that reported, only one was lower than the median forecast for the aggregate national figure.

That would suggest there may be upside risk to the median forecast of 0.4% in the harmonized measure. A 0.4% monthly gain would leave Germany's harmonized measure at 7.6% year-over-year.

Tomorrow, the eurozone's preliminary April CPI will be reported. It was expected to have risen by 0.5%, which would keep the year-over-year measure steady at 7.5%. The core rate was expected to rise to 3.2% from 2.9%. Also, the eurozone will announce is Q1 GDP figures and a 0.3% quarterly expansion is anticipated.

The euro was trading lower for the sixth consecutive session. Since Mar. 30, it had risen in only four sessions, and two of them were last week. The euro settled last week near $1.0810, and it slipped slightly through $1.0485 earlier today, a new five-year low. The low from 2017 was set in January around $1.0340, and that was the last notable low before parity. The euro has not traded below $1.00 since 2002. Initial resistance may be near $1.0570.

Sterling briefly traded at a new two-year low, slightly below $1.2500. The reactive bounce took it to $1.2570, the lower Bollinger® Band, where sellers were lurking. It needed to regain a foothold above $1.26 to help stabilize the technical tone. The Bank of England meets next week and a 25 bp hike was anticipated.

America

In recent days, economists have become more pessimistic about today's US Q1 GDP report. Recent benchmark retail sales revisions spurred the Atlanta's GDPNow tracker to cut its projection from 1.0% to 0.4%. After the US reported a much larger than expected goods trade deficit for March (a record $125.3 bln) mitigated on the margins by the stronger inventory build, other economists shaved their forecasts as well.

Inventories were particularly challenging to assess. It was difficult to distinguish volumes from price. Rising prices likely bolstered the nominal value of inventories, but was there some real accumulation as well? 

What was also important for GDP was the change in the change, so to speak. Inventory accumulation accounted for the lion's share of Q4 21's 6.9% annualized growth rate. Consumption may have also contributed more, and it looks like business investment increased. 

There were two other considerations here. First, it was generally acknowledged, included by Fed Chair Powell, that the economy was going to slow markedly in Q1. It did not represent the state of underlying growth. In some respects, the details of Q1 GDP may be better than Q4 21. Measures that excluded trade and inventories may have risen.

Also, final sales to domestic parties (personal consumption plus gross private fixed investment) looked to have improved. A strong rebound in Q2 was expected, and it could prove to be the peak before a more gradual slowdown in the coming quarters.

Second, in this important way, it may not matter very much: Regardless of the rhetoric, the Fed was on a pre-determined course to remove the monetary accommodation "expeditiously,"  the vagaries of the high-frequency economic data notwithstanding.

The weekly jobless claims, reported at the same time as the GDP figures, illustrate why. The labor market is strong, and next week's employment report is expected to see another 400k positions being filled. 

The US dollar edged up to almost CAD1.2860, its highest level since mid-March. It tested the trendline drawn off last December and the March high. The greenback settled above the upper Bollinger Band for the last four sessions. It came in near CAD1.2835 today. If the US equity market bounce can be sustained, the Canadian dollar may recover. A close below CAD1.2800 would help its tone.

Mexican President AMLO was expected to announce a deal with some large companies to limit price increase next week. Although some will see it as a form of price controls, these seemed to be self-imposed, and the government may also help subsidize some food production.

It did not seem materially different from Bank of England Governor Bailey calling on workers to show wage restraint. No one called that wage controls.

In any event, the greenback was knocking against MXN20.50 in recent days and was better offered today, but within yesterday's range (~MXN20.3255-MXN20.5365). However, after finding support near MXN20.35 in the European morning, the dollar may try the upside again.

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