FX Daily Strategy: APAC, January 23rd

No BoJ  policy change expected, so knee-jerk reaction may be JPY negative..
…but longer term outlook still JPY positive
EU bank lending survey unlikely to increase easing expectations
GBP looking a little overcooked

The BoJ meeting is the first item on the calendar in Tuesday. We expect no change in policy, with the weak wage and CPI data since the December meeting making it hard to imagine that we are going to see any more hawkish rhetoric. Even so, Ueda has indicated that a tightening of policy is on the agenda in the coming months, so the market will be on watch for any commentary, or any changes to inflation forecasts.  This is even more the case since the JPY has been very weak so far this year, so much so that it triggered some jawboning from Japanese finance minister Suzuki on Friday.

However, we doubt there will be any overtly hawkish comments, so the risks in the immediate aftermath of the meeting look to be towards a weaker JPY. But we still see the current levels of the JPY as likely to be very close to a near and long term JPY low against a range of currencies. While rising US yields have pushed USD/JPY higher this year, spreads haven’t risen enough to justify the current JPY weakness. At the same time, JPY crosses continue to benefit from low levels of US equity risk premia, helped by new highs in US equity indices in the face of rising yields. EUR/JPY continues to correlate well with this metric – much better than with yield spreads, which are already consistent with a much lower EUR/JPY. But in a subdued growth environment with the US close to full employment, it’s hard to make a case for the current high US equity valuation. Longer term risks should therefore be on the JPY upside, but for the moment we lack a trigger for a JPY recovery.

Otherwise, there is the ECB Q4 bank lending survey, which is of greater significance given the ECB meeting on Thursday. The Q3 survey showed that banks are still tightening credit standards, albeit less aggressively than they were in 2022, and further tightening could be expected to contribute to the weakness of money growth that has been dramatic in the last couple of years. But if the pace of tightening of standards continues to slow, it may not be enough to push the hawks into thinking about easing before the summer.

EU Q3 bank lending survey

However, from an FX perspective the focus is likely to be very much on equity markets, after the S&P500 made a new all time high once again on Monday, dragging European markets with it, but still coming against the background of further sharp losses in Chinese equities.  Momentum in US equities is clearly positive, and technical analysts are calling for further gains. This not only puts downward pressure on the JPY, as noted above, but also tends to support the riskier currencies against the USD. Of these, GBP may now be one of the more extended, with the CFTC data showing rising long positioning, and last week’s retail sales data serving as a warning that reports of the UK’s recovery may be overly optimistic.