Tuesday, June 25, 2024
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HomeMarket NewsJapan's Monetary Policy and FX Intervention: Key Takeaways from the G20 Meeting
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Japan’s Monetary Policy and FX Intervention: Key Takeaways from the G20 Meeting

JPY: Focus on Monetary Policy

During the weekend G20 meeting in Kyoto, Japan, the need for stable exchange rates was emphasized while also warning against increased currency volatility that could harm global economies. At the event, BoJ Central Bank President Kanda and Finance Minister Shunichi Suzuki stressed that FX intervention must be carried out sparingly and in coordination with international partners. Suzuki supported Kanda’s views, noting ongoing communication between BoJ authorities and global financial bodies.

Both officials also addressed FX market concerns. Over the weekend, Finance Minister Suzuki warned FX investors that he was closely monitoring currency movements and would act against extreme fluctuations. This sentiment was echoed in a press conference earlier this morning, where concerns about a weak JPY were highlighted, and it was noted that large FX movements were unwarranted based on economic fundamentals. They added that the Ministry of Finance would utilize all necessary measures to oversee FX markets. The rhetoric from Kanda and Suzuki is now at level 6 on a 7-level verbal intervention scale, indicating that physical intervention is likely imminent. USD/JPY did not build on the late gains seen on Monday, with the BoJ possibly considering intervention due to reduced liquidity from US and UK holidays. However, no intervention has been observed so far. 

USA Inflation Down Tick

USA Inflation downtick
Source: TradingEconomics


USD/JPY remains bearish as yield differentials between the US and Japan narrow slowly, both in the short and long term. US inflation data released last Friday was softer than expected, pushing US Treasury yields lower. Yesterday, BoJ President and Vice President indicated readiness to further hike interest rates this year, following the first increase since the financial crisis in the fourth quarter, which pushed Japanese bond yields higher. Due to a London holiday, there was no update to my FX model yesterday, but last Friday, it suggested that USD/JPY was significantly overbought in the short term. The model’s short-run fair value estimate is 152.68. If not for the holiday, it would have recommended a short position in USD/JPY.


Source: Finlogix Charts


AUD: Inflation and Market Expectations

Retail sales data for Australia slightly missed expectations, showing a 0.2% month-over-month increase in April compared with the consensus forecast for a 0.3% increase (watch my video where I discuss it in more detail here: [YouTube link]). The data was distorted by Easter and school holidays occurring earlier this year. Consequently, this retail sales data had minimal impact on RBA interest rate markets, or the AUD. Attention now turns to today’s release of the UK’s April CPI data, which is overshadowing the GBP. Upside risks from higher energy prices are balanced by discounts in retail stores and lower food prices, expected to moderate the inflation surge. BoE Governor Bailey has signalled that the Board will overlook the transient effects of higher energy prices on inflation. A significant increase in inflation, excluding energy costs, would be necessary for the central bank to consider tightening monetary policy. Key inflation pressures come from service prices, particularly rents, household utilities, and insurance, which have a lower weight in the CPI basket for the first month of the quarter. The UK OIS is now flat, indicating a small chance of a rate cut at the BoE’s June meeting but a small hike by September, presenting a two-way risk around Wednesday’s inflation data for the AUD.

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