USD/JPY Weekly Climb Fuelled by Fed Hawkishness and BOJ Actions

The USD/JPY started the week at 155.79. On May 20th, it was held around the 155 level after long-term Japanese Government Bond (JGB) yield news hit the wires that it will start to pick up. However, the pair managed to break above 156 on comments from Atlanta Fed President Raphael Bostic that rates could increase in the future. On comments from other senior Fed officials that were seen as hawkish, the USD/JPY was lifted to around 156.50 on May 21st. It continued to gain the following day and reached around 156.50.

JP10Y Daily 

 Source: Trading View USD/JPY extended its gains towards the 157 level on the broadly stronger dollar after news of the release of minutes from the Federal Open Market Committee (FOMC) meeting in the week of April 30 to May 1 (I’ve done a break down on the minutes here you can click and read it so you will have a better understand: https://acy.com.au/en/market-news/market-analysis/fomc-minutes-discussing-about-the-inflation-target-will-it-maintain-2-l-s-124523/ ). 

By May 23rd, the pair was sitting around 157 but jumped to the low 157 area after a generally upbeat US Purchasing Managers' Index (PMI) report, with the Composite PMI Output Index rising to a reading not seen since April 2022. A report, released on May 24th, that Japanese officials are on high alert for yen-selling intervention once the soft and so far, verbal intervention turns more concrete has USD/JPY top-heavy.

The dollar has rallied broadly over the past week. Sterner concerns about the two inflation concerns have helped keep the British pound tone a little firmer. Concern about inflation and softer commodity prices, despite the resilience of oil, has weighed on the Canadian and Australian dollars. Expectations that the Federal Reserve may have to cut rates were revived by the recent data involving the CPI and retail sales, which have now disappeared. Yesterday, Fed Governor Christopher Waller indicated the data "moderated the case for rate increases" but discouraged a rate cut in the near-term. 

However, it is consistent with a Fed rate cut later this year. The FOMC minutes revealed that many of the central bankers were still mulling over another rate hike. However, if the minutes were to be released before Waller spoke, it may have given the dollar a little more lift. The blackout period for the June 11-12 FOMC meeting begins the weekend. Powell does not have any public appearances scheduled, and there's no reason to believe a policy change is likely at the June meeting. The data will offer an opportunity today, in front of the May 31 publication of the April PCE deflator to shape the outlook. There are also several high BOJ officials that will be speaking at various points next week. 

Governor Kazuo Ueda and Deputy Governor Shinichi Uchida will speak at the BOJ-IMES Conference on May 27. Uchida's speech "Price Dynamics in Japan over the Past 25 Years" may not be the feed through for an immediate monetary policy decision, but it may help set the platform for changes over the longer term. Policy board member Seiji Adachi—loosely associated with re-flationist views—speaks May 29 and may help set the slightly hawkish tone which softens expectations for policy normalization. This is the last chance to speak ahead of the next meeting. According to exchange rate put/call ratios, a rate hike is possible in June, and there is "market speculation that market expectations that the BOJ will formally cut its JGB purchase program has increased".

If policy changes hinting at monetary normalization are factored, preparatory labour efforts will probably keep on happening as groundwork for these changes. A June rate hike would be very hawkish, but it would not be enough already to boost the yen substantially. This remains the dilemma of Japanese policymakers, who most likely consider the continuing selling of the yen as speculative, especially now that the policy gap is narrowing and with the negative real interest rate becoming lower. It is a stance that effectively puts a cap on the upside potential of the USD/JPY. On May 31, the Ministry of Finance will release its Foreign Exchange Intervention Operations report dated from April 26 to May 29. Based on movements in BOJ current account balances, expectations are for the MOF to have conducted JPY 8-9 trillion in yen-buying operations during this period, which will be confirmed by the report. The report will only give the total amount for the period, with the daily data to be published in the quarterly report.

Insights Inspired by MUFG (USDJPY Messaging from the BoJ): Credit to Their Analysis for Shaping Some Aspects of This Text

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