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The Yen Bounces After 13-Day Slide And BOJ Defends Yield Cap

By Marc ChandlerForexApr 20, 2022 06:45AM ET
The Yen Bounces After 13-Day Slide And BOJ Defends Yield Cap
By Marc Chandler   |  Apr 20, 2022 06:45AM ET
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The record-long yen slide stalled just shy of JPY129.50, even though the Bank of Japan defended its Yield-Curve Control cap on the 10-year bond and will continue to do so for the next four sessions. The greenback fell to almost JPY128 before steadying.

China again defied expectations for lower rates (loan prime rate), the yuan's sell-off accelerated and slid to its lowest level since last October. Chinese and Hong Kong shares fell, but most of the other large markets in Asia Pacific advanced. The Stoxx 600 was firmer in Europe, but US futures were off 0.5%-1.0%.

The Swedish krona and Australian dollar lead the major currencies, all of which were stronger against the greenback through the European morning. Central European currencies may be aided by the euro, but other emerging market currencies were heavier today.

The US 10-year yield was off six basis points to around 2.88%. European yields were also 5-8 bp lower. Gold was sold to a seven-day low near $1940 before recovering, and June WTI was consolidating in the $102-$103.65 area after being turned back from approaching $110 earlier this week.

US and European natgas are diverging. US natgas was off for a second session after falling 8.25% yesterday, it was at a four-day low. Europe's benchmark was up 2.3% today after yesterday's 7.75% gain to trade at a five-day high.

Iron ore was steady after falling almost 5% yesterday. Copper was lower. It fell yesterday to snap a four-day advance. July wheat was steady.

Asia Pacific

After last week's decision to keep the benchmark 1-year Medium-Term Lending Facility rate unchanged, the odds of a cut in the loan prime rate today fell. However, some thought it was still likely, and were disappointed by today's decision to keep the one-year and five-year rates steady (3.7% and 4.6%, respectively).

Chinese officials seemed to be continuing to struggle about how and when to support the economy. The nearly two dozen measures announced yesterday were largely micro measures to ease the pressure on households and small businesses.

More was going to be needed. In the meantime, as we anticipated, a weaker exchange rate was also a shock absorber that could be used with little pushback given the broad greenback gains. The yuan's two-day drop of about 0.7% may not sound like much, but it was the largest two-day decline since last June.

There continued to be lots of talk about challenges to the role of the dollar and diversification of reserves. Japan, with the second largest holdings of reserves, had an opportunity. The one-way market in dollar-yen, 13-sessions coming into today, was not healthy, and Japanese officials had repeatedly expressed concern about the pace of the move.

If Japanese officials wanted to reduce their dollar holdings, reduce their reserves, which had been built up in the 1980s and 1990s through intervention, wasn't this an ideal time?

The dollar was trading around 30-year highs against the yen. The dollar has risen almost 12% against the yen this year already. Central banks, it has been said, are long-term counter-trend speculators. Central banks accumulate dollar assets when the dollar is weak not strong.

This was not to suggest actual material intervention was likely. Officials would take a few more steps up the intervention escalation ladder, such as shifting the focus from the pace to the level.

They would also likely ratchet up the rhetoric to talk about "disorderly markets" and "excess volatility." These are the conditions under which intervention can be justified.

The relative strength of the yen over time had forced many industries in Japan to restructure their business to operate in a reasonably strong yen world. The yen was the most under-valued in more than 30 years against the dollar, according to the OECD's measure of purchasing power parity (-33.2%). If the yen's weakness was sustained, another major adjustment will prove necessary over time.

Japan still runs a current account surplus; it was just not driven by the trade balance. In fact, Japan reported a larger than expected March trade deficit earlier today.

The JPY412 bln shortfall reflected slower exports and stronger imports. Although the JPY130 area was widely recognized as the next important chart point, we suspected that it was no line-in-the-sand for Japanese officials.

The argument in some circles that the BOJ's cap on the 10-year yield was weighing on the yen was refuted, or at least challenged, by today's developments. The BOJ offered to buy an unlimited amount of 10-year bonds at 0.25% today and indicated it would stand ready to do so over the next four-sessions.

The yen recovered as some late shorts were covered. This would seem to suggest that if the BOJ were to abandon its yield curve control, after an initial adjustment period, the yen could weaken again.

One key seemed to be the cost of hedging and setting the currency hedge ratios. Another consideration was the appetite from non-currency hedged exposure.

The proximity of the JPY130 psychological level may have made dollar bulls a bit nervous and eager to lock in some profits. The dollar fell to almost JPY128 before bouncing, but the rally fizzled near JPY128.75. It still looked vulnerable and a break of JPY127.75 would signal the next leg down. We suspected there may be potential toward JPY126.75.

After testing the $0.7345 area in the past two sessions, the Australian dollar caught a bid and jumped to the $0.7430 area today. Out initial target was the $0.7465 area, which corresponded to the 20-day moving average and the (38.2%) retracement of the drop since the Apr. 5 high near $0.7660.

The dollar gapped higher against the Chinese yuan and traded to almost CNY6.42. It was above the 200-day moving average (~CNY6.4035) for the first time since last August.

In our weekly note, we suggested a move above CNY6.40 could spur a move into the CNY6.50-CNY6.60 area. Although the PBOC had appeared to shy away from using the daily fix to guide the market, it came back today.

The wide gap between the reference rate (CNY6.3996) and the median projection in the Bloomberg survey (CNY6.3895) was seen as a signal to sell the yuan.


UK Prime Minister Johnson's apology yesterday was carefully worded to avoid acknowledging that he knowingly misled Parliament, which likely would have added pressure for his resignation. In any event, there will be a vote tomorrow to turn the issue over to a committee on Parliament standards. With an 80-seat majority, Johnson does not have to worry about losing the vote.

Still, the defection of some Tories may capture the attention of the media. The police investigation was not over, and reports suggested the Prime Minister may be subject to additional fines. The key now is the May 5 local elections. A poor showing by the Tories, which seemed likely, may raise questions about Johnson's ability to lead the party to victory in 2024.

In France, Macron and Le Pen were to be in a nationally televised debate tonight. Both know how to play to the audience. The latest polls suggested Macron's lead had widened in recent days. While France has a strong presidential system, the parliamentary election in June may ultimately shape the next presidency.

Meanwhile, reports suggested France had offered a security guarantee for Ukraine, but Kyiv cannot count on it yet. France is a NATO member. For it to extend a security guarantee to Ukraine is a backdoor into NATO, without the formalities. It will likely be seen that way in Washington and Moscow. It will not help end the war.

Since early last year, there has been a dramatic deterioration of the eurozone's trade balance. Consider that it recorded an average monthly trade surplus of 18.6 bln euros in 2019 and 19.5 bln euros in 2020.

In the last six months of 2021, the average monthly surplus fell to 1.7 bln euros. Earlier today, it reported a 9.4 bln euro deficit for February, its fifth consecutive shortfall. The six-month average stood at a 4.6 bln euro deficit and almost a 9.7 bln euro deficit average over the past three months. The surge in energy prices was the main culprit.

The euro was bouncing today after successfully testing the ECB-induced low from last week (~$1.0760). It was at a four-day high in Europe, having approached $1.0845.

Initial resistance may be in the $1.0860 area now, but the high from last week's ECB meeting near $1.0925 may be more important. The failure to hold above $1.08 negated the constructive price action.

Sterling settled below $1.30 yesterday for the first time since November 2020. However, there had been no follow-through selling today, briefly trading above yesterday's high (~$1.3040). Still, it needed to resurface above $1.3065 to lift the tone.


The resilience reported yesterday of US housing starts and permits in the face of rising interest rates appeared to help lift US equities, and the rally appeared to have been led by other interest-rate sensitive sectors. Today's attention remains focused on the housing market.

First, mortgage applications, which have fallen for five consecutive weeks through Apr. 8, will be reported. Falling mortgage applications and reports of slower foot-traffic warn of some deterioration, as one would expect, may indeed be taking place below the surface.

The US also reports March existing home sales. The median forecast (Bloomberg survey) looks for a 4.1% decline after a nearly 7.25% fall in February. Existing home sales rose almost 6.6% in January after a roughly 3.8% decline in December.

The Federal Reserve, which does not meet until May 4, is also front and center today. At least three Fed officials speak today (Daly, Evans, and Bostic), and the Beige Book will be released later today. Powell is speaking on an IMF panel tomorrow with ECB's Lagarde.

The market understood the signal by Fed officials and has fully discounted a 50 bp hike in May and is nearly there for June as well. Note that the Atlanta Fed's Q1 GDP tracker was lifted to 1.3% yesterday from 1.1% previously. The US publishes its first estimate of Q1 GDP next week (Apr. 28) and the median forecast (Bloomberg survey) is for 1% growth.

Canada reports March CPI today. The headline is expected to have accelerated to above 6% from 5.7% in February. The central bank's underlying measures also likely accelerated. Last November, the average of the three underlying measures was 2.86%. It has steadily risen to 3.47% in February.

Earlier this month, the Bank of Canada become the first G7 country to hike by 50 bp. The swaps market haf a strong leaning of another 50 bp move when it meets next on June 1.

For the better part of two weeks, the US dollar had been consolidating in choppy fashion against the Canadian dollar, mostly in a CAD1.2550-CAD1.2650 range. It was threatening to breakout to the downside today. Initial support may be seen in the CAD1.2520-CAD1.2540 band, but better support was around CAD1.2500.

Still, the move from yesterday's high, the upper end of the range to the lower end of the range today was stretching the short-term momentum indicators. The takeaway was to be careful about chasing the greenback lower now.

The US dollar posted an outside up day against the Mexican peso yesterday by trading on both sides of Monday's range and closing above Monday's high. However, rather than signal a breakout, the price action, including the lack of follow-through dollar buying today, suggested the broad consolidation seen this month was continuing. Look for initial support near MXN19.90, though the bottom of the range was closer to MXN19.75.

The Yen Bounces After 13-Day Slide And BOJ Defends Yield Cap

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The Yen Bounces After 13-Day Slide And BOJ Defends Yield Cap

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