USD/JPY Tanks About a Full Yen

Markets

Barring an outdated US Q4 GDP and PCE revision there was again not much to inspire markets yesterday. Speeches from Fed’s Williams, Collins and Bostic yielded the known mantra of data dependency and caution against premature cuts. That resulted in muted trading. Core bonds gained with US Treasuries outperforming, specifically into the final hours of US trading. Net daily changes varied between -2.2 (30-y) and -5.6 bps (2-y). German yields eased less than 2 bps Equities meandered around the highs. Wall Street recorded some minor losses. Investors favoured the largest currencies over the likes of NOK, SEK and especially AUD (weaker than expected January CPI) and NZD (central bank softened its rate hike threat). EUR/USD closed almost unchanged but experienced a sharp intraday U-turn. The pair tested the 1.08 big figure in early European dealings. Some flagged French president Macron’s apparent openness towards (NATO) boots on the Ukrainian ground and the Kremlin’s staunch warning against it as a reason for euro weakness. The common currency recovered in the hours after. The trade-weighted dollar eked out a small gain to just south of 104. Sterling and the Japanese yen completed the top four of the scoreboard. The latter is jumping straight to the first place this morning, though. Bank of Japan  Takata gave a strong signal towards the end of the central bank’s ultra-easy monetary policy. He said the 2% price target is finally coming into sight and put Japan “at a juncture for a shift in the entrenched belief that wages and inflation won’t rise.” His speech comes at a time when dwindling growth momentum and decelerating (but still above-target) inflation is closing the BoJ’s window of opportunity. Takata’s “It’s fine to shift the gear one notch lower” now rekindles speculation even if he said it wouldn’t be one rate hike after another. USD/JPY tanks about a full yen to below 150. Japanese yields rise between 0.9 and 2.6 bps with the 2-y setting a new 13-year high. US Treasury yields are broadly stable and currencies ex JPY trade mostly flat. Today’s economic calendar finally gets a bit interesting. The US publishes PCE deflators for January. These lag the regular CPI’s but being the Fed’s preferred inflation gauge they are worth following. Other US data include weekly jobless claims and personal income & spending. The European eco calendar focuses at national inflation readings from France & Germany over Spain to Portugal. Risks, if any, are slightly tilted to the downside. Markets have come a long way in finally adjusting to central bank talk. For this reason both US PCE and European CPI would have to deviate strongly in one way or another to unlock the rates – and by extension the FX stalemate.

News & Views

News agency Bloomberg refers to an email sent out by the US Bureau of Labour Statistics, commenting on the unexpected surge in January CPI inflation and more specifically rental inflation. The BLS indicates that the weights for single family detached homes increased materially from December 2023 to January 2024. The relative weighting compared to multifamily units changed. Both contribute to the owner equivalent rent (OER) component which is by far the largest individual component of the CPI basket. Giving more importance to the single-family detached homes suggests that OER can remain sticky at high levels for longer given restraint supply in this specific part of the housing market.

Reuters provides more off the record insight on the ECB’s future liquidity management for the banking sector. The framework needs changing following the end of the negative/zero interest rate policy and as the ECB started draining excess liquidity by winding down its APP/PEPP bond portfolios. Sources suggest that the central could as soon as March 13 announce a “demand-driven” floor system, similar to the Bank of England’s approach. The ECB will thus still effectively set the lowest rate at which banks can lend to each other. Under the system, the ECB would also lower the main refinancing rate (4.5%) closer to the deposit rate (4%), reducing the penalty and stigma for financial institutions short in cash (narrow corridor). In the future, the ECB will no longer single-handedly decide how much liquidity it provides to the banking system via its regular refinancing operations, but consult commercial banks on determining the amount. Other decisions would include allowing some fluctuation in ESTR around the ECB’s own deposit rate and keeping minimum reserve requirements at 1% of customer deposits.