Currency markets are awaiting a slew of central bank meetings this week, led by the BOJ on Wednesday, then the Fed, and finally BOE. Markets see a small possibility of a rate hike for the BOJ, and a better than even chance for a rate cut at the BOE, and any surprises could stir up volatility. The DXY index has also firmed above mid-104 levels, as investors puzzle over the strength of the US economy given a pickup in Q2 growth and await Fed guidance for rate cuts.
USD/JPY has stabilized around 153-154, with risks still biased to the downside. Markets have largely priced in BOJ’s QT last week, with the pace of JGB purchases reportedly set to be halved over 2 years. The Ueda-led BOJ had not surprised markets on the hawkish side in its policy meetings thus far, and risks of large unwinds are also smaller now given that many JPY shorts were shaken out last week. Still, it will be unlikely that the market mood swings back towards JPY bearishness post-BOJ. For one, the start of QT signals that monetary policy Is set to tighten further, which indirectly caution speculative JPY shorts from overextending again. Second, the BOJ is starting to align its balance sheet policy with other major central banks, with both the Fed and ECB having begun QT in 2022 and 2023 respectively. We had argued and still maintain our view for a cyclical bottoming of the JPY, with Japan poised to reverse its monetary policy divergence with the US.
USD/CNH has also stabilized around 7.26-7.27 ahead of FOMC. PBOC has maintained its stable RMB policy with CNY fixings being kept near 7.13, even after it eased monetary policy in the last week. The 1Y MLF rate was cut by 20bps last Thursday to 2.30%, following a 10bps LPR cut. China PMI releases tomorrow may give little respite for the RMB as activity looks to stay sluggish. A more durable downshift in USD/CNH will depend on a broad USD reversal, with Fed guidance this week being front and centre.
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