Global FX: Yen intervention, re-assessing USD bearish view, central bank rundown

[MUSIC] Hello everybody and welcome to JP Morgan's Attenhamidate podcast. I'm Mirak Chandand, co-head of FX Strategy at JP Morgan. Join today by my colleagues from all parts of the world. We will have a bit of an Asia focus because obviously the start of the week was Yen. Stole the show with the Moth intervention, so that's something we do need to break down. I think actually the FMC was important as well. It had hawkish undertones. I could have some lofting implications for the dollar depending on how the data evolves. I think potentially we are now inching towards opening up the distribution on even hikes potentially, although the bar is high. But certainly it looks more balanced rather than asymmetric, Kaleigh Davish, which was the case a few months ago. Of course, the question that's left me wondering basically, is there any reason to still be bearish on the dollar? Yes, I think the dollar should weaken an ADF collection, but shades of US exceptionalism are undoubtedly coming back across various dimensions. So we are taking a bit more balanced and neutral sort of stance on the dollar as we are assessing that and we are assessing how the data is going to come in. And then among other topics, of course, we had a whole lot of bunch of DM central banks that went by this week and we also have the RBA next week along with the payroll. So we're going to unpack all of that now. But let's start with the latter with the RBA in particular, because it's already laid out in Sydney. I'm joined today by Ben Jarman. Ben on the RBA, what are your thoughts here? Obviously they've been, they've been packaged for a while. As he's done really well, what do you think is the balance of risks going into it, this event and then anything on Keebe as well, while we've got you on this podcast? Sure, thanks, Mira. So for the RBA, next week, we're thinking that they deliver another 25 basis points, which would be a third hike in a row, taking the cash rate back to where it was before the last year's easing shallow easing cycle. So I think if we get what we expect on the day, it's going to be more or at least positive Aussie, in the sense that you still have this idiosyncratic theme of an active hike are being demonstrated, and the meeting is not fully priced. Also, if you recall the previous move in March, it did look like a relatively close call. There was a split vote of five to four to hike. We don't think it will be as close this time, just because one of the reasons for the uncertainty before was that it wasn't a forecast round. It was the early days of the around situation, and they just didn't quite know whether there would be immediate growth concerns. This time around, we've had a little bit more water pass under the bridge. We've had the strong one QCPI data, and there will be upward revisions to the forecast. So I think all that considered the message will be hawkish, and while there might be a split vote, it probably won't be a split as last time. But stepping back from the actual decision on the day, I do think this idea of the idiosyncratic rate cycle story is getting quite mature for Aussie now. We do think that after this move, the RBA won't have a lot more to do. And when we look at, by the way, the relative tone of the RBA versus the G10 pack on our hawk dove scores, the gap between the RBA and the rest is at pretty extreme levels. So if we are, particularly if we're in a kind of de-escalation regime where other central banks are starting to really entertain pushing towards, a proper hiking cycle, and that could be on the basis of just inflation, dominating any minor growth concerns, but plays out that way, then Aussie just starts to stick out a little bit less. So I guess the kind of flicks of a pivot from the Fed that we got this week are a little bit symptomatic of that. On Kiwi, our view has been that they will be, in terms of the central bank, they'll be much more gradualist. They're starting from much more accommodative policy. So they've been pretty clear, I think, in their framework that they are going to look through immediate pass through of higher fuel prices, and will only really be responding if they feel that there is tightening capacity use and that the growth recovery is still in train. So we have some low market numbers there next week. I think that will be important, but we're expecting a slight reduction in the unemployment rate. So that will keep the story on track, but I think it's relative to what the market's pricing. I'm not expecting that to be particularly kind of bullish Kiwi need term, because we do think the market's gotten ahead of itself in terms of pricing the Arbians' head to move fairly imminently here, whereas we think that's more like three meetings forward. Thanks, Ben, and you can see the differentiation, I guess, between Aussie and Kiwi, based on this carry differential. And I suppose the energy terms of trade is helping as well, but that has certainly been one strong dynamic, which I keys to my boss experience as far as the relative carry differential's or concern in DM can sort of last unexpectedly. Let's move to Junia and the Yan. I mean, this has been pretty big week for Japan. To me, that the BOJ net net was hawkers despite the dissents we saw, but also the intervention was the big story. I'll be dumb to that intervention now, and do you think what do you think is the path forward for Yan? Do you think this is a fade or not? Thank you very much, Heather for the matter, and the first question. So let me start with the BOJ discussion. So given the elevated uncertainty over the middle-reached situation, are they making it difficult for the BOJ to raise weight actually? BOJ left is policy rate and change that role we expect. However, as you say, communication was quite hawkish. In particular, six to three-board, a larger part of the division had the two inflation out of the window to report, and the governor with us emphasis on the upside risk to inflation, and signs that governor with us is beginning to recognize the risk of being behind the curve, characterized hawkish tone. The BOJ appeared to have a clear intention to raise weight on the if the situation in the Middle East does not deteriorate further. Therefore, we expect a late hike in June, and the BOJ will continue to regulate at the pace of the once every six months. The BOJ's hawkish hold successfully had prevented Yan from an acceleration of depreciation. However, the WEM broad-dressed rent driven by higher oil prices pushed the Yan into the high at the 160s. It is the highest and since dry at the 2024, Ministry of Finance decided to conduct Yan buying intervention for the first time since dry 2024. BOJ's data suggests that yesterday's intervention amounted to about 5263 on Yan, nearly cold highs. Because our direct target as of 164 had assumed that intervention would occur before the R&D chase 162, yesterday's intervention does not affect our medium-term MMPR issue view. Generally speaking, the full currency like Yan freely traded under free-floating exchange rate regimes with a large market size. It is very difficult for the effects intervention to stop oil libers that trend driven by fundamentals. In addition, Japan's intervention must comply with G7 FX commitment. Since G7 profit rates targeting specific quick exchange rate level like a DRIM 160 to 160 other assumption-rider, any attempt to buy the Japan's authority to depend on a particular level would run counter to others' commitment. Wild options have set coordination with the US is in place. Both Japan and the US Finance Minister's meeting in April last year and the US Japan joined to statement in September, confirmed other variants that due to G7 commitment. For these reasons, unless the factors supporting our Yan barely issue view are global monetary policy cycle that has become less supportive for Yan and policy mix under the Takaichi administration, aggressive fiscal policy, supported by the official monetary policy, changed materially. We expected DRIM to ultimately blame above intervention level and rise further. However, in the 2022 and 2024 episodes, when DRIM rebounded after the initial intervention induced decline and returned to the original intervention level, the Minister of Finance did not attempt to depend on that level, effectively allowing DRIM to blame above it and continue rising. It looks about the three weeks in 2022 and about two months in 2024, DRIM to rebound and move above initial intervention level. Given that while DRIM upside is likely to be limited in the near time, we eventually expect DRIM to break out above recent ranges and therefore maintain our year-end target of at the 164. That's what we mean. Thank you. Thanks a lot, Junia. From a strategy standpoint, we've been using Yan as a funder versus Nauki. It's probably not a bad one versus Wauji as well. So, stallion staying in a range to different slightly higher, I think that's should play out reasonably well. So thanks for your comments there. James, let's move to the European Central Bank. So I mean, obviously we had the ECB this week. And I would say that they were hawker in the sense that some signaling that June very much is a goal. But and two hikes for that matter this year or a goal. But the markets already well priced to that, if not a lot more. So they don't really surprise markets. And as we've been saying, for the euro, if we get a hawker shark come from the ECB, given this growth backdrop and the terms of trade adverse backdrop, don't really think that it changes the euro status as a funder from my mind. What was the case with BOE? It's been a decent week for sterling. So I could call on that. So takeaways from the BOE. And then also we did the deep dive on UK politics last week. But if you want to give us a two line around that, it'll be quite useful going into the May 7 elections. Yeah, sure. Thanks, Mira. I wouldn't say too much of a surprise from BOE. Yes, this week really, yesterday. Obviously, the eight one vote, pill dissenting. That's interesting in the sense that he's kind of the intellectual core of the committee. So you could see if the case builds over the next few months for tightening further in terms of the data displaying just further tendency of resiliency and sticky price pressures, then we can see more of the fringe members trying joining Pills View. And it does feel like they are setting themselves up for tightening. Certainly our rate strategists are saying, do not fade the tightening that's priced. So there wasn't too much for sterling to react to ultimately, because the vote was pretty close to the consensus survey. There wasn't anything too outlandish in the forecast in terms of the scenario forecast that they set out. The press conference was pretty middle of the road. I thought in terms of the guidance around the second round effects, it was interesting that Bayley talked about food prices as something that they might be focusing on going forward, given the share of energy costs in there. But I think that guidance itself around second round impacts was interesting. And then Bayley expanding that in the press conference saying that by the time they show up, it's too late. So you need to be acting quite early. That had a modestly hawkish lean to it. But I think the sterling strength that we saw yesterday, I wouldn't really pin it too much on the bank of England. I think some of it might have been in contrast to the ECB. Some of it might have been more of a function of dollar weakness on the day. So I wouldn't put it too much to the BIOE. I thought BIOE was pretty middle of the road. But as you say, we are in a carry environment. And I think sterling is really the only high yielder in G10, maybe apart from the dollar, where you have positioning the other way in the sense that the market's probably not as short-stirling as it was, but it is still short. And you look at the backdrop of very high data surprises, the level of carry a central bank that looks like it wants to tighten policy. And politics that I think in terms of the UK politics, the market's been dealing with for some time now. So you saw sterling's correlation to the probability of stammer stepping down was very high back in February. That's when we were grappling with that issue. And that sensitivity has dropped off a lot recently. I think that speaks to the idea that firstly, that carry is dominating. Secondly, that the political timeline is just such that we, let's say we get the local elections next week. There's a formal challenge to stammer. We'll probably see some knee jerk weakness on the back of that formal challenge. And then you might need to wait until September to find out who's the next PM. So that's a lot of time between now and then that investors would have to give up the carry accumulation. And I think that can kind of work in sterling's favor in terms of maybe chipping away at some of that short positioning base. I think for the local elections, it's self next week on the 7th. I'm not really expecting spot to move too much on the kind of exit poll, the vote counting, the result. Unless it's a kind of shock strength, shock strong labor performance. I'd say a kind of a bad performance from labor, I'd say, is very much priced in at this stage. It has been for a while. And it would really take labor holding on to some of those kind of northern councils, which have traditionally been strongholds for them, like Blackburn or Preston. And that kind of following through to a stronger performance that would be the surprise. And sterling would be stronger on that, because it would be a kind of political continuity type outcome. But I think the bigger issue is whether there's a formal challenge to Stammer over the coming weeks. And I do think you can see sterling knee-jerk weakness on that. But similar to how we saw this week, when the vote in the commons on the Mandelson issue was announced on Tuesday by the times, sterling knee-jerked weaker and then actually went on to make new highs versus euro on the day. And that's the kind of dynamic we're thinking about, whether there is a rebound after the challenge to Stammer, given the backdrop. OK, thanks. And then maybe a quick expectation around the Nordstbank and Ricksbank next week as well. Sure. Yeah. I think our call in the end is for both central banks to be unhold. We're not getting new forecasts. Obviously, the conflict uncertainty continues. But there is still clear divergence between the two central banks in terms of-- well, we're pricing 15 basis points for next week for the Nordstbank. So there is some uncertainty there that if you look at the breakdown of the consensus forecast, there are three or four banks going for a hike. So there's some uncertainty there. We think they stay unhold. But even if they do and that pricing comes out for next week, you're still looking at the knocky being a high yielder that should remain supported as long as yields and broader yields. And energy prices are quite sticky. A currency where it was only a couple of months ago, we were talking about very, very cheap valuations for knocky. And obviously, they're a bit less cheap now. But in the broader context of things, if you think about real effective exchange rates, it's still a cheap currency. Inflation, OK, we had a slight undershoot on the last print, but it's still running at pretty sticky levels. So Nordstbank won't want to take any chances there. They're still going to keep the communication that they may need to tighten over the summer. And that should limit any kind of sell off, I think, in knocky. And it's more of a buying opportunity if they don't hike. And there's a bit of knee-jerk weakness in knocky on the day, I think, next week. For Rick's Bank, it's really the opposite story where they've had, I think, five or six inflation misses in a row now. We're actually thinking more about core inflation that's going to be printing sub 1% over the next couple of months and potentially staying there for a while, which really stands in contrast to some of these are the central banks. And up until a week or so ago, it was actually Sweden was the only economy in GTAN where you'd seen inflation revisions from our economists come down through the conflict. So I think that tells you the inflation pictures really quite different there. And I think Rick's Bank have to keep that in mind. So the guidance will be-- still be that they could potentially hike over the coming months. But the market knows that they can't be as forceful here in terms of the language, particularly compared to the likes of Norge's Bank, the Fed, Bank of England. And that just keeps stocky as a funding currency. And I think it was quite remarkable yesterday when we saw the strength in the yen on the back of the intervention. I was scratching my head as to why stocky was actually strengthening on that. And you know, Mira had to remind me that it's a funding currency in this environment. It's not a cyclical currency. And that's very much the way we're thinking about it. Well, thanks for the shout out there, James. OK, last but not least, far from it, Patrick, I think the Fed was quite important actually this week, given that the underlying message was quite hawkers. So why don't you talk us through that? And then I guess BOSC as well. I mean, cards actually, I perform pretty well. Someone knows some things going on there and any thoughts on payrolls as well next week. Yeah, sure. Thanks, Mira. Yeah, no, agree on the importance of the Fed. And I think it comes down to what you said at the outset, which was, you know, there's fewer and fewer, obviously, bearish components for the dollar view right now. Certainly kind of like the Fed's asymmetric reaction function has been a heavy weight on the dollar for the better part of the last couple of years. But now you're obviously starting to see that kind of neutralize a little bit more, even if they technically left the slight easing bias in the statement. But you know, like just generally for me, it was the overarching theme of the whole meeting was just dissent, right? So. Powell basically saying he's not going to resign his position and like not even political like the mechanics of it will basically mean that you know worse will now have to replace Maran instead of Powell's open seat so mechanically that means you know one less kind of like Donish remember the board but then obviously in the statement as well you have the three dissents you know for changing the language so certainly the committee kind of like moving in that direction and then even in the assessment of the fundamentals you know Powell described inflation basically as misbehaving and that the labor market is effectively stabilizing so all that is consistent with a you know less dubbish less asymmetric reaction function overall of course the market already moved there you know rates market took out any kind of residual cuts for this year about a month ago but it was important to note that on the meeting day market basically brought forward and priced up hikes for the first quarter next year on one point we I think we had 13 basis points baked in for a rate increase in the first quarter of 27 so market is getting a little bit more comfortable with this idea that the Fed is no longer obviously asymmetric down with a little bit more biased and we'll see kind of what the data gives us kind of from here but the bottom line there for the dollars that you know it's certainly a less bear dollar bearish Fed than what it has been if the very if the very least it's more neutral and maybe is shifting a little bit more towards a dollar supportive Fed and from here depending on the trajectory on the B.O.C. my read was that yes the market interpreted it as relatively hawkish and maybe insured and yields were higher than everybody else on the day of course this was the day that Brent hit 120 so there's a lot going on but you know Canadian yields outpacing everybody else still stood out the bank did talk about a scenario in which consecutive hikes might be appropriate they hadn't really talked about hikes very explicitly before and the idea of consecutive I think probably stood out but again that was a kind of a scenario analysis that's certainly not their base case and its contingent on effectively energy price inflation spilling over more obviously into core now what I argued on the day was that that's still a reasonably high bar to achieve Canada's inflation trajectory has also been very weak maybe not quite as weak as Sweden but you know core inflation metrics have been drifting lower or missing consensus estimates and see seem kind of heavily anchored around 2% and the bank still maintains it excess supply is still still in the economy so basically the output gap can help absorb any kind of like parent uptick in core inflation so I think really for core inflation move considerably higher is a pretty high bar which to me lowers the risk of hikes and on the other hand I thought was really interesting was that the bank of Canada is also the only central bank talking actively about cuts I think all central banks obviously are aware of kind of like negative growth spillovers from the energy price prices but they're not talking about cuts the B.O.C. talked about cuts explicitly because of a very Canada specific issue which is the ongoing structural trade structural divorce from the U.S. and the implications for U.S. Canada trade they basically said there are scenarios in which they might still have to cut this year based on how the U.S. MCA renegotiations go whether there's more tariffs etc so I thought that was actually you know a reasonably kind of downbeat assessment and I thought an interesting question the press conference was you know what does the B.O.C. think is more important for the economy the energy price shock or you know trade relations with the U.S. and they said over the medium term it's still trade relations it's more important and again so that kind of biases them more doubly towards cuts I think that should also kind of serve as an anchor so I don't see the B.O.C. doing a whole lot in the policy rate anytime soon that should kind of continue I think to anchor cat is kind of a funder with its relatively low yield. Yeah I hear you on that bat I hear you on the funder bit but I think it's kind of interesting as well that if I look at our systematic models for example it seems to have improved on a bunch of metrics like the data is looking bit better prices are more positive compared to other countries obviously the tones of trade has been moving in its favor and I agree with you on the dollar the dollar is looking a bit better than maybe can have an unexpected sort of bid I don't know you know that's something like that's been weighing a bit on my mind but you know I also put it down to something like Keevi which has been a low yield of her while and has from time to time had a similar uplift but it's not really it's not really managed to respond to that so you know fair enough I guess I've carries the overarching theme then then that's fine but you know the dollar gets a little bit better that can be a bit of risk what about payrolls what about payrolls next week? Yeah we think you know obviously last month on payrolls was quite strong so we're wondering if there might be a little bit of a payback on the headline I think generally speaking various estimates of break evens are falling closer to zero they had been maybe closer to 50 so it increases the odds of you know potentially a negative number but that's still within a very kind of like tight overall labor supply so there's I think a sense that the unemployment rate could still remain basically unchanged maybe even maybe even drift a little bit lower so if you get like a very lowish number on the headline but effectively you know low like a unchanged unemployment rate I don't think the dollar probably does a lot on that if you get a situation where headline is strong and back-to-back months unemployment's flat so lower and the Fed is you know signaling a little bit more discomfort I think that probably gives the dollar a little bit more legs to the upside so I think that's kind of how it would look for for next week. Okay make sense and for what it's worth if I look at the dollar weakness in 25 actually yes it was about the German fiscal and the European fiscal but it was also about payrolls softening and that seems to have brought about so so that's yet another reason why I'm wondering is the picture is actually turning here for the dollar. But let's wrap it up we've had a long one this week thank you very much for joining this communication is provided for information purposes only please refer to JP Morgan Research Reports related to its content for more information including important disclosures of 2026 JP Morgan Chase and Company all rights reserved this episode was recorded on May 1st 2026.