BoJ Stands Out as Risk-off Returns

FX Markets Experience Volatility Amid Banking Crisis and Central Bank Meetings

It’s been a busy week in FX markets after looking initially at the start of the week as though traders would hit the snooze button as they await next week’s crackerjack list of risk events. These include pivotal major central bank meetings in the shape of the RBA, Fed, and ECB, as well as top tier data like US ISM and next Friday’s monthly non-farm payrolls report. This week’s focus in FX markets was to be the Governor Ueda’s inaugural Bank of Japan meeting after ten years of leadership by previous chief Kuroda.

But markets have had a spicy entrée, with the small matter of the March banking crisis rearing its head again as First Republic Bank revealed that depositors had fled in huge numbers ($100 billion to be more precise) during the banking stress. Uncertainty over the group’s plans to divest some of its assets has added to volatility and seen the dollar struggle to find a foothold against its medium-term downtrend.

Risk aversion would ordinarily give a bid to the greenback but lingering questions around the banking system and dovish repricing in Fed rate expectations are taking its toll. The latter have steadily risen since the end of last week with now roughly 75bps of easing baked in by year-end, from just above 50bps. Strong data from GDP and the PCE inflation figures tomorrow will be needed to change this ahead of next week’s FOMC.

BoJ Surprise in Store?

Consensus expects no changes to the ultra-loose monetary policy stance at the conclusion of the Bank of Japan meeting tomorrow morning. This stands in huge contrast to the other major central banks which have been raising rates aggressively. New Governor Ueda, who takes the helm chairing his first meeting, continued to suggest an unlikelihood of a policy tweak this week as he hinted it seems appropriate to maintain current policy given recent economic developments. Will he spring a shock, as previous Governors have been known to do, or is sudden policy normalisation off the table for now?

Recent data has been mixed with much focus on inflation data which is elevated. Importantly, policymakers will release their latest forecasts for GDP and CPI which will include projections for 2025. There have been reports these would be below the 2% price goal and so justify a delayed exit from easy policy.

But markets will be on the lookout for any clues about potential moves in the future, with some BoJ watchers citing a policy tweak in June. This could potentially entail a more flexible twist to its current forward guidance, laying the groundwork for a shift if events warrant it. This would see yen buyers flood in and take USD/JPY lower towards 131.

Written on 27/04/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

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