BoJ in holding pattern already look fully priced
JPY starting to recover in the crosses, especially versus CHF
FOMC meeting triggers correction, but yields don’t suggest a big change in trend
UK retail sales unlikely to have a big impact, GBP may lose post-FOMC cross gains
NOK weakness unlikely to persist
The BoJ policy decision on Friday expectedly had no yen impact. The BoJ has decided to extend the pandemic relief program by another 6 months and also introduced a new climate change facility, details of both will be seen in the July meeting. Otherwise, the tone and content of the statement remains very similar to before with no hints on changes to its key monetary policies. This is in contrast to most other DM central banks, but any yen-negative sentiment due to the BoJ is likely already fully priced into the worst G10 currency of the past year. USD/JPY got close to the 111 level that marked the YTD high, last seen in April when the 10yr yield spread with the US was over 100bps above current levels. While further upside in yield spreads can be expected, it was notable that the JPY has recovered on the crosses since the FOMC decision, and from a big picture perspective the JPY is undervalued even if yield spreads return to April levels. CHF/JPY looks a particularly extended cross, with the SNB re-emphasising their opposition to CHF strength and their continued ultra-low rates at the SNB meeting yesterday. The gains seen in CHF/JPY since the pandemic hit look particularly difficult to justify given the CHF status as the other prime safe haven. We have already seen a sharp reversal in the last 24 hours, but we see a strong case to return to the pre-pandemic levels near 1.10.
The FOMC meeting did produce a slightly less dovish Fed stance than had been evident in March, but the impact on US yields has been comparatively modest, with 10 year yields still only in the middle of the range seen since February, and well below the highs seen in March. Spreads with bunds are very much in the range seen in the last 3 months, and the sharp decline in EUR/USD seen since the FOMC consequently looks like an overdue unwinding of positions triggered by the FOMC rather than a key fundamental change to the outlook. In the absence of another big move in yields, the FOMC looks like it will mark a confirmation of the 1.17-1.2350 range seen this year rather than the start of a new trend lower. While we do expect yields to move a little further in the US’s favour over the year, this will to some extent be balanced by a deteriorating current account position, and for now we would still look for range trading to persist.
GBP has edged a little lower in response to the weaker than expected UK May retail sales data, but in context the numbers really aren’t particularly significant. While volumes fell 1.4% in May, this followed a 9.2% gain in April, and the 3m/3m growth rate is running at 8.3% in volume terms. The GBP dip is comparatively modest compared to the weakness seen in the last couple of days, but this weakness has put the long uptrend seen over the last year under threat. The UK market focus will now be on the June 24 BoE MPC meeting, when we will see if there is any change in stance in response to the higher than expected inflation data seen of late. We doubt there will be, and this suggests to us that the GBP outperformance of the EUR seen in the wake of the MPC may be reversed before too long, but this may have to wait until next week.
The weakness of the scandis was a notable aspect of trading on Thursday, with the NOK being one of the weakest of the G10 currencies in spite of the Norges Bank indicating a rate hike was likely in September and also in each of the following four quarters, underlining Norges Bank’s status as the first and most aggressive rate hiker among the G10 central banks. That the NOK failed to rally on the news suggests that the market was expecting something close to what was announced, but if that is the case, it hadn’t been reflected in NOK strength ahead of the meeting. Indeed, the NOK has underperformed relative to the normal metrics like oil and yield spreads. We still think that the upcoming rate hike will bolster the NOK going forward, and the 10.20 area in EUR/NOK looks like a good medium term selling area.