FX Daily: JPY between dovish BOJ and risk-off

Watching BOJ guidance on negative rates.
Group Research, Chang Wei Liang22 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    The USD had firmed slightly post-FOMC, but the more striking impact is a surge in the US 10Y yield to 4.50%, and a uniform decline in equities globally. Investors were perhaps disappointed that the Fed had signalled that it could keep its restrictive stance for longer in 2024, in comparison to its 0.4% upward revision to its 2024 growth forecast.  In a departure from the Fed’s hawkish surprise, both BOE and SNB surprised on the dovish side as they held rates unchanged rather than hiking, underscoring a shift in European concerns from inflation towards growth. GBP/USD slipped only marginally below 1.23, with Governor Bailey committed to a restrictive stance saying that it is premature to discuss rate cuts. CHF weakness was more pronounced, with USD/CHF rebounding towards mid-0.90, its highest level since June. Switzerland’s decision is justified with inflation already tracking below 2%, but the BOE still faces a difficult situation with inflation above 6%, even if its pace has moderated. 

    The BOJ meets today, and there is possibly new guidance on its negative interest rate policy (NIRP). If guidance indicates a one-off 10bps hike next year to bring rates back to zero, the JPY could weaken on relief as this is already anticipated in swap markets. But it would be a surprise if guidance shifts to indicate that policy rates could rise further above zero, given that Ueda had been underscoring the need for patience in maintaining policy easing. We expect BOJ to stay dovish, with USD/JPY likely to move back towards the 148-150 range, restrained by reduced risk appetite and concerns of MOF intervention. Yellen had affirmed this week that the US understands the need to smooth out undue volatility if there is FX intervention by Japan, which suggests that intervention is a growing risk for JPY markets.

    USD/CNH is consolidating around 7.30, anchored by a remarkably steady string of onshore CNY fixings around 7.17 this week. Given last week’s data showing that Chinese activity had stabilized with a rebound in credit growth, the 1Y MLF and loan prime rates were left on hold, which should shore up fragile RMB sentiment. Offshore RMB liquidity conditions remain tight, with 1M CNH HIBOR rate being quite high at around 4.4%, though it has eased somewhat compared to last week. We expect significant volatility in the offshore RMB rates market heading into China’s Oct holidays, given a clear policy bias to ward off RMB shorts and stabilize the exchange rate.

    USD/KRW rose towards 1340 amid a hawkish Fed and risk-off sentiment, even as Korea’s first-20 days exports lodged a large 9.8% y/y growth for Sep, marking a sharp turnaround from a 16.5% contraction in Aug. If sustained, improving export growth could help bolster Korea’s economy, providing support to the KRW.

    Quote of the day
    “The two most important days in your life are the day you are born and the day you find out why.”
         Mark Twain

    22 September in history
    The Plaza Accord was signed in 1985.

    Chang Wei Liang

    FX & Credit Strategist


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