The Japanese yen has edged higher on Wednesday. In the European session, USD/JPY is trading at 151.17, down 0.26%.
Yen falls to 34-year low, will Tokyo intervene?
The Bank of Japan raised interest rates last week for the first time since 2007. The move marked a sea-change in monetary policy. However, the tightening has not translated into gains for the Japanese yen, which remains under pressure. Earlier today, the yen fell as low as 151.97, its lowest level since 1990.
Will the yen's slide trigger a currency intervention from Japan's Ministry of Finance? The MOF intervened last October when the yen dropped to 151.94, which means we are clearly within "intervention territory". The MOF's response to the current decline, however, has been limited to verbal intervention.
On Monday, as the top currency diplomat, Masato Kanda, sent a warning to speculators that he was concerned by the yen's slide, saying it did not reflect fundamentals. Earlier today, Japan's finance minister, Shunichi Suzuki, warned that excessive movement by the yen would be answered with "decisive steps".
Japanese officials have limited their response to the yen's woes with jawboning but the risk of intervention is very real and will increase if the yen continues to lose ground. Still, it should be noted that last year's interventions didn't really get the job done, as yen gains were short-lived.
The lack of certainty as to whether Tokyo will intervene to prop up the yen could result in volatility for USD/JPY and investors will be listening carefully to every comment coming out of the BoJ or the MOF.
USD/JPY Technical
USD/JPY remains range-bound on the weekly chart:
The Japanese yen continues to have a quiet week. In the North American session, USD/JPY is trading at 151.36, down 0.03%.
BoJ core inflation eases to 2.3%
Bank of Japan core inflation fell to 2.3% in February, down from 2.6% in January and shy of the market estimate of 2.5%. The release further complicates the inflation picture in Japan, as we continue to see inflation indicators heading in all directions. The BoJ core inflation index eased in February ,while the services producer price index climbed 2.1%, unchanged from January.
The BoJ made a massive pivot last week as it raised interest rates for the first time in 17 years. The central bank is counting on rising service inflation replacing cost-push inflation as the main driver of inflation, which it expects will make inflation sustainable around the 2% target.
The shift in monetary policy has not translated into a win for the yen, which is above the 151 line. There is the threat of currency intervention, as Tokyo intervened last September and October when USD/JPY rose above 152. Japanese officials are trying to jawbone the yen higher before resorting to intervention, with Japan's top currency diplomat sending a warning on Monday to speculators from trying to sell of the yen, saying the currency's recent slide did not reflect fundamentals.
In the US, it was a mixed day. Durable goods recovered in February with a gain of 1.4% m/m in February. This followed a 6.9% slide in January and beat the market estimate of 1.1%. The Conference Board consumer confidence index was almost unchanged at 104.7 in February, compared to 104.8 a month earlier. This was shy of the market estimate of 107.
USD/JPY Technical
The Australian dollar has extended its gains on Tuesday. In the European session, AUD/USD is trading at 0.6557, up 0.26%. On today's data calendar, the US will release two tier-1 events. Durable goods orders are expected to rebound with a 1.1% gain in February, after a 6.1% slide in January. The Consumer Board consumer confidence index is expected to tick up to 107 in February, up from 106.7 in January.
Australian CPI expected to rise slightly in February
Australia's inflation rate is expected to creep up in the February report, which will be released on Wednesday. The market estimate stands at 3.4% y/y for February, compared to 3.4% in January.
That could set back expectations for a rate cut from the Reserve Bank of Australia, which has kept rates unchanged at 4.35% for four straight times. The markets are of the view that the RBA's tightening cycle is done and have priced in a rate cut later in the year. Still, the RBA hasn't ruled out rate hikes, with inflation still well above the 2% target.
The central bank needs to be sure that once inflation reaches the target, it can be sustained at that level and is likely to be very cautious before shifting policy and cutting rates. The RBA doesn't meet until May and barring a huge surprise will again keep rates unchanged.
Australia's Westpac consumer confidence declined 1.8% in March to 84.4, worse than the market estimate of -1.6%. The index has been below 100 since February 2022, indicative of prolonged pessimism about the economy. Consumer confidence took a hit after the 6.2% gain in February, as frustrated consumers didn't see any signs of a rate cut at the RBA's meeting earlier this month.
AUD/USD Technical
This is a follow-up analysis of our prior report, "CHF/JPY Technical: Potential major bullish trend exhaustion" dated 13 March 2024. Click here for a recap.
The CHF/JPY cross-pair has remained soft as it failed to surpass its 50-day moving average at around 170.00. The previous minor rally from the 11 Mar 2024 low of 167.08 was rejected at the 50-day moving average on 21 March 2024 and reversed sharply to the downside thereafter with a loss of -296 pips/-1.73% in the past three sessions as it printed an intraday low of 167.83 today, 26 March at this time of the writing.
Fig 1: 1-month rolling performances of G-10 CHF crosses as of 26 Mar 2024 (Source: TradingView, click to enlarge chart)
This recent bout of sharp downside reversal of the CHF/JPY has been attributed more to the CHF side of the equation as the Swiss National Bank (SNB) surprised market participants last Thursday, 21 March with a rate cut of 25 basis points (bps) to 1.5% on its key policy rate, its first cut in nine years, and ahead of the US Federal Reserve, Bank of England (BoE), and European Central Bank (ECB).
One of the push factors for enacting an earlier rate cut by SNB is the persistent strength of the franc that could erode the competitiveness of Swiss goods and services which in turn put a dent on economic growth prospects in Switzerland.
The CHF has weakened across the board against other major G-10 currencies and not surprisingly, the CHF is the weakest against the EUR with a loss of -2.5% based on a one-month rolling performance basis with the CHF/JPY coming in fifth position in the pecking order of CHF's weakness (see Fig 1).
Fig 2: CHF/JPY major & medium-term trends as of 26 Mar 2024 (Source: TradingView, click to enlarge chart)
Fig 3: CHF/JPY short-term trend as of 26 Mar 2024 (Source: TradingView, click to enlarge chart)
In the lens of technical analysis, the major uptrend of CHF/JPY in place since the 13 January 2023 low of 137.44 has shown signs of bullish exhaustion. Firstly, it has traced out a bearish "Ascending Wedge" configuration from the 3 October 2023 low where such configuration/chart pattern typically appears at the end of a significant uptrend phase (see Fig 2).
Secondly, medium-term upside momentum has turned lacklustre as depicted by the observations seen in the daily RSI momentum indicator where it has flashed out a persistent bearish divergence condition since 10 January 2024.
Thirdly, the final straw came after the CHF/JPY broke below its 20-day moving on last Thursday, 21 March ex-post SNB.
In the short-term as depicted in its hourly chart, the latest price actions of the CHF/JPY have transformed into a minor downtrend phase after today's bearish breakdown below its minor ascending trendline from the 11 March 2024 minor low.
If the 169.00 key short-term pivotal resistance (also the 20-day moving average) is not surpassed to the upside, the CHF/JPY may continue to display further weakness to expose the 167.10 near-term support and its key support at 166.55 (the 200-day moving average & lower boundary of the "Ascending Wedge").
A daily close below 166.55 increases the odds of a major bearish breakdown scenario for the CHF/JPY that is likely to trigger the start of a potential major multi-month downtrend phase.
Conversely, a clearance above 169.00 negates the bearish tone for a choppy minor corrective rebound for the next intermediate resistances to come in at 170.00/20 and 170.70 (medium descending trendline from 22 February 2024 high).
OANDA Senior Market Analyst Kelvin Wong joins Jonny Hart to discuss this week’s key economic data and events. A relatively quieter week versus last week’s major central banks’ galore as we head into the Easter holiday with several key events and economic data to take note.
Firstly, risk of currency war is lingering around the horizon after China central bank, PBoC’s move to weaken the onshore Chinese yuan daily fixing on last Friday, 22 March that led the offshore yuan (CNH) to tumble by -0.8% against the US dollar to hit a two-week low. This move seems to be a deliberate attempt to maintain some form of exports’ competitiveness for China after the surprise rate cut from SNB ahead of the Fed, and ECB that has occurred on Thursday, 21 March that triggered a bout of US dollar strength resurgence. A further weakening of the yuan may spark the revival of currency war vibes as major exporters such as South Korea, and Singapore join in the bandwagon to weaken their domestic currencies against the US dollar which in turn increases the odds of a global risk off episode.
Lastly, we have the release of Australia’s monthly CPI data for February on Wednesday, 27 March, and the all important closely watch US PCE inflation data out on Friday, 29 March.
The Japanese yen is showing limited movement on Monday. In the North American session, USD/JPY is trading at 151.25, down 0.13%.
Yen can't find its footing
Last week's Bank of Japan was dramatic as the central bank raised interest rates for the first time since 2007. The move did not catch the markets completely by surprise, as some media reports ahead of the meeting said the BoJ would raise rates and investors were looking at both the March and April meetings as strong possibilities for a rate hike.
The yen did not respond to the rate hike with gains, as might have been expected. There are several reasons for this. First, the actual tightening was limited, with rates rising from -0.10% to 0.10%. This means that although the BoJ rate is now in positive territory, the move had little impact on the wide USD/JPY rate differential. BoJ Governor Ueda said after the meeting that despite the hike, monetary policy would remain accommodative, saying that there was "some distance to go" until inflation climbs to the 2% target.
As well, many investors approached the BoJ meeting with a "buy the rumour, sell the fact" approach and this resulted in heavy selling of the yen after the rate announcement. The yen slipped 1.60% last week and dropped as low as 151.86, its lowest level since November 2023.
The Japanese yen has dropped to levels that could invite intervention – the Ministry of Finance intervened last September and October when the yen dropped to around the 152 line. If the yen continues to lose ground, the threat of intervention will become greater.
In the US, the markets have priced in three rate cuts this year, and the Fed also projected three cuts this year at last week's meeting. However, Atlanta Federal Reserve President Raphael Bostic sounded hawkish on Friday when he said that he expects only one quarter-point cut this year.
Bostic said that he was "definitely less confident than I was in December" that inflation will continue to drop towards the 2% target, as he noted that inflation remains stubbornly high and the US economy has been more resilient than he expected.
USD/JPY Technical
The Australian dollar has started the week with slight gains, after sliding 0.86% on Friday. In the European session, AUD/USD is trading at 0.6530, up 0.24%.
PBoC move sends Aussie sharply lower
The Australian dollar ended the week with sharp losses after China's central bank set the daily fixing of the Chinese yuan lower than expected on Friday. The PBoC weakened the yuan in order to boost China's struggling economy and the move led to an AUD/USD sell-off on Friday. China is Australia's number one trading partner, and currency interventions such as the PBoC move can have a major impact on the Australian dollar.
It's a light day on the data calendar, which means we can expect a quiet day for AUD/USD. The only tier-1 event is US New Home Sales, which is expected to rise to 680,000 in February, up from 661,000 in January.
Australia releases Westpac Consumer Sentiment on Tuesday, with the markets braced for a decline of 1.6% for March. This follows a sparkling 6.2% gain in February, as consumer confidence climb sharply after the Reserve Bank of Australia held interest rates earlier in February. Consumers expressed optimism that the RBA had winded up its rate-tightening cycle.
In the US, the markets have high hopes for three rate cuts this year, and the Fed's "dot plot" projection at last week's meeting also projected three cuts this year. However, Atlanta Federal Reserve President Raphael Bostic dampened the mood on Friday when he said that he expects only one quarter-point cut this year. Bostic said that he was "definitely less confident than I was in December" that inflation will continue to drop towards the 2% target.
AUD/USD Technical
This is a follow-up analysis of our prior report, "Hang Seng Index Technical: The countertrend rebound phase may have ended" dated 5 March 2024. Click here for a recap.
In the past two weeks, China, and Hong Kong benchmark stock indices (CSI 300, Hang Seng Index, Hang Seng TECH Index & Hang Seng China Enterprises Index) have traded sideways after recording gains of between +16% to +24% from their respective early February lows to recent mid-March highs.
These recent bouts of positive performances have propelled China and Hong Kong to be the top-performing major stock markets in February and are supported by the absence of a strong US dollar environment that reduces the risk of capital outflows as China remains mired in a deflationary risk spiral as well as ongoing high tech trade war with the US since 2018.
Hence, the recent rallies and outperformance of the key China and Hong Kong benchmark stock indices have been indirectly supported by a stable Chinese yuan where the CNH (offshore yuan) has traded in a tight range of 0.7% against the US dollar between 5 February to 12 March.
Last Thursday, 21 March, the Swiss National Bank (SNB) engineered a surprise on market participants by enacting a rate cut of 25 basis points (bps) to 1.5% on its key policy rate, its first cut in nine years, and ahead of the US Federal Reserve, Bank of England (BoE), and European Central Bank (ECB).
One of the push factors for enacting an earlier rate cut by SNB other than a clear deceleration in inflationary trend (annualized core inflation rate has remained below 2% since May 2023) is the persistent strength of the franc that could erode the competitiveness of Swiss goods and services which in turn put a dent on economic growth in Switzerland.
The EUR/CHF cross pair has accelerated its decline in the past three years where it tumbled by -17% to print a close of 0.9270 on 5 January 2024, a fresh all-time low on a closing level basis since the surprise EUR/CHF unpeg on 15 January 2015 (intraday low of 0.8600 with a daily close of 0.9753).
The CHF tumbled after the surprise SNB's decision; it fell by -1% against the EUR to its weakest level since July 2023. Also, it dropped -1.2% against the US dollar to hit a fresh four-month low.
Interestingly, the offshore yuan (CNH) tumbled by -0.8% against the US dollar to print a two-month low last Friday, 22 March after the China central bank, PBoC set a weaker-than-expected daily fixing on the onshore yuan (CNY).
This latest set of FX policy moves by PBoC is likely to have signaled a willingness to sacrifice some form of capital outflows over maintaining exports' competitiveness to drive economic growth, and to fill the gap in the absence of robust domestic demand.
If the US dollar continues to strengthen due to the Fed's less dovish stance (in no hurry to cut rates), it may lead to a bout of engineered currency devaluations among major exporters such as South Korea and Singapore which is likely to put pressure on PBoC to weaken the CNH further to make up for a further potential loss of trade competitiveness.
Overall, a persistent US dollar strength trend may trigger "beggar-thy-neighbour" currency war-liked monetary policies among exporters.
Fig 1: CNH/USD direct correlation with CSI 300, HSCEI & HSI as of 25 Mar 2024 (Source: TradingView, click to enlarge chart)
In the past two years, periods of significant weakness in the CNH (offshore yuan) against the US dollar have triggered a negative feedback loop back into the China and Hong Kong stock markets but to a lesser extent in emerging stock markets excluding China (see Fig 1).
Therefore, the recent softness seen in the CNH may trigger another round of potential multi-week bearish movements in the CSI 300, Hang Seng China Enterprises Index, and Hang Seng Index.
Fig 2: Hong Kong 33 Index major trend as of 25 Mar 2024 (Source: TradingView, click to enlarge chart)
Fig 3: Hong Kong 33 Index short-term trend as of 25 Mar 2024 (Source: TradingView, click to enlarge chart)
The price actions of the Hong Kong 33 Index (a proxy on the Hang Seng Index futures) have staged a bearish breakdown below its former ascending channel support in place since the 22 January 2024 low and its 20-day moving average on last Friday, 22 March.
In addition, the daily RSI momentum has also broken below its key parallel ascending support and just breached below the 50 level which indicates a potential revival of medium-term bearish momentum.
In the lens of technical analysis, this latest set of bearish elements suggests the recent rally of +16% from the 22 January 2024 low of 14,777 has taken the form of a "bearish flag" configuration, aka countertrend rebound motion within its major and long-term secular bearish trend phases (see Fig 2).
Last Friday's bearish breakdown seen in the "bearish flag" and its daily RSI suggested a likelihood that the bearish impulsive down move sequence has resumed.
If the 16,960 key short-term pivotal resistance is not surpassed to the upside, the Index may see a further potential decline to expose the next intermediate supports at 16,135 (also the 50-day moving average), and 15,730 (see Fig 3).
However, a clearance above 16,960 negates the bearish tone to see a retest on the 17,230 minor swing high area of 13 March 2024, and above it sees the medium-term pivotal resistance coming in at 17,570/600.
The Canadian dollar has extended its losses on Friday. USD/CAD is trading at 1.3569 in the North American session, up 0.29%.
Canada's retail sales slip in January
Canada's retail sales fell 0.3% m/m in January, revised from the earlier estimate of -0.4% and well off the 0.9% gain in December. The decline was driven by a sharp drop in motor vehicles and parts dealers (-2.4%).
The silver lining was that six of nine sub-categories showed an increase, which points to some strength in consumer spending. The estimate for February retail sales stands at 0.1%. Year-to-year, retail sales rose 0.9% in January, shy of the forecast of 2.5% and well off the December gain of 2.9%.
The retail sales data comes on the heels of the inflation report for February, in which inflation fell to 2.8% y/y. This was better than expected and the lowest rate since June 2023.
Core CPI, which excludes energy and food and is considered a better indicator of inflation trends, fell to 2.1% in February, which was lower than expected and the lowest level since March 2021.
With inflation continuing to fall toward the 2% target, pressure is growing on the Bank of Canada to lower rates and provide some relief to households, which are feeling the squeeze from elevated interest rates and the high cost of living.
The Bank of Canada has maintained the cash rate of 5.0% for six straight times and rates have likely peaked, although the BoC hasn't signaled that it plans to lower rates.
The markets have priced in a rate cut in June at around 70% and other major central banks are moving in the direction of lowering rates. There is a 70% probability that the Fed will lower rates, according to the CME FedWatch tool, and the Swiss National Bank surprised with a rate cut on Thursday, the first major central bank to lower interest rates.
USD/CAD Technical
The British pound has extended its losses on Friday. In the European session, GBP/USD is trading at 1.2600, down 0.45%. Earlier, the pound fell as low as 1.2584, its lowest level since March 20.
UK retail sales unchanged in February
UK retail sales were flat in February, after a revised 3.6% gain (m/m) in January. This was better than the market estimate of -0.3%. On an annualized basis, retail sales fell by 0.4%, erasing most of the 0.5% gain in January. Britain's weather was unusually wet in February which dampened retail trade.
Dovish BoE sends pound tumbling
The Bank of England maintained the cash rate at 5.25% at Wednesday's meeting. The pause was widely expected and marked the sixth straight time that the BoE has kept rates unchanged.
Perhaps the most significant development at the meeting was the Monetary Policy Committee vote. The MPC voted 8-1 to keep rates unchanged, with one member voting for a quarter-point cut. This was the first time in the current tightening cycle that no members voted for a hike – at the previous meeting, two members voted to raise rates by a quarter-point.
The markets pounced on the vote as evidence of a dovish shift in the Bank's stance and the British pound sank 1% on Wednesday, its worst one-day performance since October 2023.
It looks like rates have peaked, but when can we expect the BoE to start cutting rates? Governor Bailey said after the meeting that inflation is not "yet at the point where we can cut interest rates, but things are moving in the right direction". The markets are looking at an initial cut in June, with an outside possibility in May.
GBP/USD Technical
