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Summary
- This week saw a torrent of central bank rate decisions, highlighted by the Bank of Japan (BoJ) ending its negative interest rate policy (NIRP).
- Also, the Swiss National Bank (SNB) surprised markets by cutting rates by 25bps.
- The US Federal Reserve (Fed) and Bank of England (BoE) kept policy steady with comparably less fanfare, as did the Reserve Bank of Australia and Norges Bank.
Market Implications
- After liking EUR/CHF higher for several weeks and following the surprise SNB move, we see upside in the pair having (for now) run its course and prefer to be patient before initiating our next CHF position.
- USD/JPY downside looks attractive, especially with the pair trading above 150.
G10 Central Bank Deluge Provides Talking Points
This week saw six G10 central banks provide policy updates – one of the busiest weeks of the year for developed market monetary policymakers. So what happened, and what can we trade?
US Federal Reserve
As my colleague Dominique Dwor-Freqaut wrote, the Fed stuck to its narrative of continued but slower disinflation and kept three cuts in its Summary of Economic Projections (SEP) for 2024.
Moreover, Fed Chair Jerome Powell also made it clear the central bank would not attempt to cap growth to accelerate disinflation.
Dominique’s base case remains that the Fed will cut rates three times (75bps in aggregate) this year, in line with the SEPs, an unchanged prognosis from before Wednesday’s rate announcement.
The USD reaction was muted, if somewhat choppy, because of the Fed’s messaging, with the USD index (DXY) remaining well within its recent range.
Chart 1: Orange Line = US Dollar Index
We expect this rangebound price action to continue in the coming weeks.
Price action in individual USD pairs will vary (see more on USD/JPY below). But in aggregate, we expect no short-term material breakout of the range above.
Bank of Japan
As we expected, the BoJ ended its NIRP policy this week.
Additionally, the central bank ended yield curve control by removing the cap on 10-year yields, as well as ending ETF and J-REIT purchases, in what was a wide-ranging policy adjustment.
Since the decision, USD/JPY has rallied (in classic ‘sell-the-rumour, buy-the-fact’ fashion), taking the pair to a new intraday high year-to-date (YTD), just below 152.
Chart 2: Orange Line = USD/JPY Spot Price
With USD/JPY back above 150, we see room for downside, with the pair likely to trade much nearer its YTD low in the coming weeks.
Typically, moves above the 150 threshold have triggered verbal intervention from the Japanese Ministry of Finance (MoF), which we think could happen again.
To that end, we have already seen messaging from the BoJ, ostensibly designed to strengthen the yen.
During Jerome Powell’s press conference on Wednesday, a Nikkei piece appeared, speculating that the next BoJ rate hike could come July or October.
As far as ‘official Japanese messaging’ is concerned, this Nikkei article was quite tame.
It did, however, at least temporarily, weigh on USD/JPY. We think that the longer the pair remains above 150, the more likely it is that more forceful verbal (or actual) intervention will materialise.
We therefore like being tactically short USD/JPY.
Bank of England
The BoE, in line with market expectations, left interest rates unchanged yesterday.
There was one dovish outturn, however, from the policy update.
Two notable hawkish dissenters, Catherine Mann and Jonathan Haskel, both voted to keep rates unchanged, after having voted for immediate rate hikes until yesterday.
The UK short end reacted dovishly to this switch, with the 2-year UK gilt yield dropping as much as 12bps yesterday before settling 6bps lower at the close.
The currency market reaction, however, was much more muted, with EUR/GBP trading modestly higher but still locked within its recent trading range.
Chart 3: Orange Line = EUR/GBP Spot Price
despite the dovish rate market reaction, EUR/GBP found no material upside traction. As such, we expect that the pair will continue to trade in its tight range in the coming weeks.
Swiss National Bank
The SNB surprised markets yesterday by cutting its policy rate by 25bps.
Ahead of the rate decision, markets priced ~9bps of cuts, or a ~36% probability of a 25bps rate reduction.
The surprise saw a sharp drop in CHF, with the currency falling ~0.70% on a trade-weighted basis yesterday.
Yesterday’s price action was a sharp extension of action over the past month or so.
During that time, EUR/CHF has grinded higher, with a notable spike yesterday on the SNB announcement.
EUR/CHF upside has been one of the few tradeable trends in the G10 currency space so far this year.
Chart 4: Orange Line = EUR/CHF Spot Price
That said, after the nice upmove and SNB surprise, we think there is limited near-term upside for the EUR/CHF.
The pair is (over)due a pullback, especially as we now think short CHF market positioning is quite crowded.
Nonetheless, the SNB, through its actions yesterday, set out its stall and made it clear that they are not comfortable with the CHF back at levels seen late last year and in January.
As such, we like to wait for a pullback in EUR/CHF to re-enter a long position.
Reserve Bank of Australia
The RBA kept policy unchanged this week. Given that there was only roughly a one-in-three probability of a 25bps rate cut, an on-hold central bank came as no great surprise.
There was ‘something for everyone’ in the RBA messaging this week.
On the one hand, Australian policy makers sounded like they were ever-so-slightly more confident of getting inflation back to target, saying that ‘recent information suggests that inflation continues to moderate, in line with the RBA’s latest forecasts.’
On the other hand, however, the RBA cited the outlook remaining ‘highly uncertain,’ adding that ‘the Board is not ruling anything in or out’ regarding interest rate policy.
Since the RBA announcement, the AUD TWI has chopped around, trading very near the middle of its YTD range.
Chart 5: Orange Line = AUD Trade Weighted Index
Given the balanced RBA messaging, our inclination is to monitor price action and see if AUD can gain any material traction in either direction.
Norges Bank
The Norges Bank kept rates unchanged yesterday, as expected.
The Norwegian central bank said in its statement that ‘the policy rate will likely need to be maintained at the current level for some time ahead in order to bring inflation back to the 2 percent target within a reasonable time horizon.’
Norges Bank also highlighted uncertainty for the Norwegian economy going forward, keeping its options open for a rate move in either direction if conditions warranted.
Over the past two months, the NOK range on a trade-weighted basis has been ~3%.
Chart 6: Orange Line = NOK Trade Weighted Index
Although the NOK TWI currently trades at the lower end of its short-term range, until further clarity emerges from Norges Bank on the direction of monetary policy, we prefer to wait before initiating any NOK risk.
BoJ and SNB Prompted Biggest Immediate Reaction
Given the BoJ’s move away from NIRP, and the SNB’s surprise decision to cut rates, it is no wonder the key moves were in JPY and CHF. Nor is it surprising these two currencies offer opportunities in the coming days and weeks.
The trade we like most in FX now is short USD/JPY primarily because Japanese intervention, either verbal or actual, will keep the pair from appreciating much.
And, after being our favoured position for over one month, we think that further near-term upside in EUR/CHF is probably limited. The pair is poised for a pullback, so we would like to be patient and watch price action before initiating further CHF positioning.
Patience will also be required across the rest of the G10 space. After a torrid flow of central bank policy updates this week, most developed market currency pairs remain mired in ranges.
Until greater clarity emerges, we will monitor price action and wait for better opportunities.
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Richard Jones writes about FX and rates markets for Macro Hive. He has traded and invested in interest rate and FX market portfolios spanning three decades, both on the buy-side and sell-side.
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