FX market on intervention watch

The USD is king of the G10 FX space so far this week. The constant upward pressure on USD/JPY since last week’s BOJ meeting has pushed USD/JPY up by 0.5%, and the yen is now at a 34-year low vs the dollar. This has led to a number of Japanese officials trying to verbally intervene in the currency, in an attempt to give the yen a boost.

On Wednesday it was the turn of the finance minister who warned that the BOJ could intervene directly in the markets in an effort to strengthen the yen. This has caused some volatility in yen crosses this morning, with USD/JPY dropping 40 pips. However, verbal intervention has a history of being ineffective, and USD/JPY is already trying to claw back earlier losses as we move through Wednesday morning. Now, the expectation is that the BOJ has their finger on the trigger to purchase yen, which is one of the last options that the Japanese central bank has left to try and prop up their currency.

Thus, we will be on the look out for a sharp reversal in USD/JPY, although the magnitude of the move will depend on how much yen the BOJ purchases. To have a long-lasting effect they will need to buy yen in bulk and continue to do so for some time. The timing is also worth watching. Will they wait until the weekend, when the US and European markets are closed for Easter, to try and benefit from illiquid markets? Or will they wait until Friday’s core PCE data release in the US. If the data is weaker than expected, then the USD could come under downward pressure and do the BOJ’s work for them.

Europe’s inflation problem

Elsewhere, March CPI data from Spain was released this morning, and it may not be too comforting for the ECB. Headline CPI rose by 0.8% this month, with the annual rate rising to 3.2% from 2.8% in February. The EU harmonized rate of annual inflation also rose to 3.2% from 2.9%, which was a touch lower than expected, but it is still moving in the wrong direction. There was good news for core prices, which moderated to 3.3% from 3.5%, however this is still well above the ECB’s 2% target rate. Spain is considered a leading indicator for the currency bloc when it comes to price data. Trends in its data tend to show up before they do in the overall data for the currency bloc. This suggests that prices are on the move again. The monthly growth rate of 0.8% also suggests that inflation will remain volatile as we move into Q2.

This explains the reluctance of ECB President Lagarde to confirm to a rate cutting cycle. She sounded less dovish than her counterparts at the Fed or the BOE, when she said that even if the ECB cuts rates in the first half of this year, they will not pre commit to further rate cuts. Thus, the ECB could take a slow and steady approach to rate cuts this year. When inflation is rising at a 0.8% monthly rate, you can understand why. The market still expects 3.5 rate cuts from the ECB this year, with rates expected to fall 87 basis points. This looks less likely after the Spanish inflation print. More price data will be released from France later this week, which could reinforce the view that the Eurozone is not out of the woods when it comes to inflation.

European stocks are fairly directionless and remain close to record highs, as we wait for economic confidence data. This is a pause after an amazing quarter for European shares, the Eurostoxx 50 index is higher by 9.31% on a euro basis so far this year, which is a stronger performance than the US S&P 500. Q1 earnings season and incoming economic data will determine if this strong performance can be replicated in Q2.

Oil and Bitcoin decline

Consumer discretionary stocks along with energy are the lagging sectors in Europe on Wednesday. Brent crude oil is falling on Wednesday, and is lower by nearly $2 this week, which is weighing on energy stocks. One word on cocoa, which we called the new luxury good on Tuesday after it reached a record $10,000 a tonne. It has backed away from this level on Wednesday, but it still is above $9,600 a tonne. There is a touch of risk off in alternative and commodity markets today and Bitcoin has also slipped below $70,000. This could be on the back of thin liquidity, and some profit taking as we get closer to month and quarter end.