A week packed with central bank decisions starts on a mixed note after hotter-than-expected US inflation sent the US 2-year yield around 25bp higher over the week and the 10-year yield spiked past the 4.30% mark. Stocks resisted to higher yields for the major part of the week, but the mood was not brilliant on Friday. The S&P500 fell from an ATH, as equity bulls also started feeling the heat of hawkish fears before this week’s FOMC meeting and stocks in Europe were also sold off before the weekly closing bell.
In the FX, last week saw the US dollar rebound and majors retreat against a globally stronger greenback. The EURUSD sank below 1.09, Cable fell after hitting the highest level since last summer and the USDJPY traded past the 149. While the dollar’s appreciation was easy to understand against the euro – where the European Central Bank (ECB) members sounded explicit about their intention to cut rates in June, and against sterling – where softer jobs data supported the Bank of England (BoE) doves, the persistent fall of the Japanese yen was surprising, even more so as the news that big Japanese corporation met the wages demand kept coming in throughout the week. On Friday, the country’s biggest union group announced that they secured a pay rise of nearly 5.30%. But in vain, the USDJPY kept rising. The yen bulls remain surprisingly reluctant to take action and the implied volatility in the yen markets remains surprisingly low compared to the levels we saw back in summer, when the Bank of Japan (BoJ) decided to double its target rate on JGB 10-year yield, and last December, when the BoJ was supposed to give a clearer hint on when they would exit the negative rate policy.
Some reasons for the lack of enthusiasm could be
- There are still many people – like me – thinking that there is a greater chance for the BoJ NOT to act this week but wait for the April meeting instead. If that’s the case, there is not much incentive to sell the yen at the current levels, because there is little potential for a worthy rise in the USDJPY above the 150 level.
- Even if they raised, the rate hikes in Japan will be slow and the BoJ will likely continue to buy JGBs.
- Federal Reserve (Fed) hawks weigh heavier on sentiment.
Whatever it is, the yen bulls are tired of getting disappointed by Mr. Ueda, who hinted that the bank is not in a rush to normalize.
Elsewhere
Fed expectations for this week’s meeting are mixed. We know that the Fed won’t change its interest rates this week, but the fresh forecasts and the dot plot will give a good hint on what the Fed members think about the latest economic data. The Fed members walk into this week’s meeting having seen a two-month jump in inflation, healthy jobs data, above-average economic growth and robust corporate earnings. Yes, there has been a renewed stress regarding the regional banks after the jitters around the NY Community Bancorp at the start of the year but that stress has been isolated and contained. Hence, there is a chance that the Fed members plot fewer rate cuts for this year and we see the median expectation fall to 2 rate cuts, from 3 plotted in December. If that’s the case, I would expect the US yields and the dollar extend gains and mood in equities sour and that would be such bad luck for Reddit that’s preparing to go public on March 21.
The Reserve Bank of Australia (RBA), the Bank of England (BoE) and the Swiss National Bank (SNB) will also announce their latest policy verdict this week and are expected to maintain their rates unchanged. The SNB will likely follow in the footsteps of the ECB and act in the H1. The RBA on the other hand is much more concerned by a renewed pressure on inflation and some RBA hawks even think that the bank won’t cut the rates at all this year. A hawkish stance from the RBA may not stop the AUDUSD’s selloff if the Fed sounds decidedly hawkish as well. The Aussie-dollar is better bid this morning on better-than-expected Chinese data and news that the Chinese would maintain fiscal spending to boost growth. But we shall see the pair sink below 200-DMA if dollar bulls come back in charge.
