Ueda is NOT Helping JPY Performance

USD: Stronger US inflation & Ueda sticking to status quo help lift USD/JPY

During the Asian trading session, the US dollar maintained its strength, following its climb back above the 105.00-level in the previous week's dollar index. Particularly, the US dollar has demonstrated its dominance against high-risk commodity currencies such as the Australian dollar, New Zealand dollar, and Norwegian krone, throughout the night. The trigger for the US dollar's renewed upward momentum at the end of last week was the release of the US PCE deflator report for January, which exceeded expectations and raised concerns among investors regarding the risk of prolonged inflationary pressures. According to the report, both headline and core deflators experienced a substantial increase of 0.6%M/M in January. Additionally, the Fed's preferred inflation measure, the PCE services (excluding energy and rent), increased by 0.57% M/M, elevating the annual rate from 4.7% to 5.4% compared to the previous month. This highlights that services inflation is becoming more persistent. The US rate market has moved accordingly to price in a slightly higher probability that the Fed delivers a larger 50bps hike at the next FOMC meeting on 22nd March and a more extended hiking cycle.

As of now, there is approximately a 31-basis point increase in Fed rate hikes priced in for March, and an increase of around 83 basis points priced in for this year. The current situation makes it challenging to argue against the hawkish repricing of Fed rate hike expectations that has been fueling the US dollar rebound this month. However, the release of activity and inflation data for February will provide a better understanding of the extent to which better weather and seasonal adjustment factors have contributed to this boost.

The recent increase in US rates has also aided in lifting USD/JPY above the 135.00-level and brought it closer to its 200-day moving average, which sits at approximately 137.10. At his confirmation hearing in front of the Upper House of parliament in Japan, Kazuo Ueda spoke again, and his comments failed to trigger an increase in speculative demand for the yen. He stated that achieving the price stability target would still require time and emphasized the need to continue with easing to support the economic recovery. While he acknowledged the side effects of current policies, he believes that their merits outweigh them. Ueda also stated that there was no need to change the joint statement between the government and BoJ and that he would continue to pursue Abenomics to achieve the 2% inflation goal. Overall, Ueda's comments are in line with the current BoJ policy thinking, which could dampen expectations for significant or quick changes in policy settings when he becomes Governor in April. Our analysts in Tokyo predict that the BoJ will abandon Yield Curve Control in Q2 while maintaining negative rates this year. However, there is a higher possibility that further adjustments to YCC may take longer. This leaves the yen vulnerable to weakness in the near-term as yields outside of Japan are once again on the rise.

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