Yen spikes higher but rhetoric losing its impact quickly

JPY: Modest further gains on Katayama warnings

The yen jumped sharply in earlier trading today following comments from Finance Minister Katayama. USD/JPY broke briefly below the 158.00 level but has retraced quickly and is slowly grinding back higher toward the level when Katayama spoke. The price action continues to highlight the sensitivity of the market to intervention rhetoric but also how quickly the impact of comments fade. Katayama repeated today that the MoF is prepared to take “decisive action, including all available options”. Katayama added that options include intervention which is part of the agreement set between Japan and the US. Looking at option market pricing you also see signs of a market that remains sceptical of intervention. Option pricing indicates indifference although 1-week vol and risk-reversal pricing is similar today to July 2024 just before intervention last took place that ultimately proved successful helped by the BoJ and the Fed.

One source of reservation in conducting intervention at this moment is the fact that there will be a BoJ meeting next week, with an announcement on Friday. There is nothing priced for that meeting and indeed you have to go all the way out to July before another rate hike is fully priced. Based on the tone of rhetoric in a speech by Governor Ueda this week it looks very likely that the press conference will confirm more of the same this year – a BoJ that remains very cautious over the pace of rate hikes ahead. Governor Ueda gave no impression that the depreciation of the yen was in any way altering the BoJ reaction function. He merely repeated the common guidance of there being a need for further rate hikes if the economy unfolded as expected.

BoJ caution, election risks that have emerged and communication from Fed officials in the US all point to risks of intervention failure. Philly Fed President Paulson is the latest Fed official this week to signal content with pausing to assess the economic outlook from here. Anna Paulson comes in this year as a voter making her comments more significant. She stated that she wanted “monetary policy restrictiveness to be playing a role to get us all the way back to 2%”. A slow grind higher in USD/JPY will probably see the MoF remain slidelined and a shift in tone from the BoJ to a clearer opposition to yen depreciation and possible hints of an earlier rate hike would potentially open up scope for intervention that could prove more successful. 

USD/JPY CORRELATION WITH SHORT-TERM SPREAD HAS BEEN WEAKENING

Source: Bloomberg, Macrobond & MUFG GMR

AUD: RBA expectations helps AUD year-to-date

The Australian dollar is the top performing G10 currency so far this year and in fact is the only G10 currency that has managed to advance versus the US dollar. This has come despite the turnaround in certain commodities. Iron ore started the year well but in recent days has corrected lower while momentum in gold is softening and there was a sharp drop in energy prices yesterday. The trimmed mean inflation data was in line with expectations (3.2%, down from 3.3%) but there was a larger than expected drop in headline inflation – 3.4% from 3.8%.

But that data has not altered policy expectations with the OIS curve pricing about 40bps of monetary tightening from the RBA this year. That scale of tightening is the largest amongst all G10 central banks at the moment and underlines expectations of better economic conditions ahead. On Monday, household spending data reinforced those expectations with a 1.0% MoM gain in November, which followed a 1.4% MoM gain in October. That’s the strongest two-month period of spending since Sept-Oct 2022.

RBA communications in December from Governor Bullock and in January from Deputy Governor Hauser indicated the RBA sees the next move more likely being a hike rather than a cut. Hauser signalled the RBA can be patient but if the consumption data was matched with better labour market data the risk of markets moving forward the timing of that first hike will increase. A hike is not fully priced until August. The market consensus for economic growth is to see a pick-up from an estimated 1.9% in 2025 to 2.2% this year – that would be the strongest growth rate since 2022. Consumer spending will be further supported this year by tax legislation already passed that will see the basic income tax rate cut from 16% to 15%.

The performance of CNY is also helping provide support for AUD. CNY is in fact the second best performing Asian currency year-to-date with only the Thai baht modestly outperforming. The gain is very modest versus USD, just 0.3%, but most of Asia is weaker versus the dollar. Trade data this week helped provide CNY with support. China exports jumped 6.6% YoY, helping lift the trade surplus to USD 11.4.1bn, up from USD 111.7bn. Excluding the surge in exports last year ahead of tariffs being implemented, this is the largest two-month trade surplus on record. Bloomberg today reported that a record USD 100bn of foreign exchange was converted back to CNY in December, six times more than in November as expectations of CNY strength encouraged the pick-up. Pressure to allow CNY to strengthen will continue to build. A bigger risk-off in global markets would likely see AUD suffer but the fundamental backdrop looks supportive for further gradual AUD gains.

CNY GAINS PROVIDES SCOPE FOR FUR AUD STRENGTH FROM HERE

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com