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Yen Trilateral Support Ahead of Golden Week

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 



Golden Week in Japan, spanning the end of April to the beginning of May, marks a cluster of national holidays, including Showa Day, Constitution Memorial Day, Greenery Day, and Children's Day. The annual holiday period is characterized by widespread celebrations, family gatherings, and a significant surge in domestic tourism. Businesses and government offices shut down during this time, resulting in reduced economic activity and trading volumes in financial markets.   


Ueda and Suzuki address parliament on the state of the Yen  


On Tuesday, Bank of Japan (BoJ) Governor Kazuo Ueda and Minister of Finance Shunichi Suzuki address parliament concerning inflation, interest rates, and strategies to address the persistent weakness of the yen.  


Ueda emphasized that should trend inflation move towards the 2% target as anticipated, there may be a need for rate adjustments. The upcoming meeting on Friday, coinciding with the release of the updated quarterly outlook, was initially viewed as a prime opportunity for the BoJ to raise rates from negative territory. Following a hike in March, the BoJ must consider mounting price pressures resulting from factors such as record wage growth, elevated oil prices, and a weaker yen, leading to imported inflation. Currently, the market assigns a mere 10% probability of a BoJ rate hike on Friday.  


Minister of Finance Shunichi Suzuki underscored the significance of the recent trilateral meeting involving Japan, South Korea, and the United States. This meeting laid the groundwork for Japan to take ‘appropriate action’ in the currency market. Suzuki further stated during a post-cabinet meeting news conference that authorities are not ruling out any options when it comes to addressing recent volatile movements in the JPY, movements that appear disconnected from underlying economic fundamentals.  


As we look ahead to the upcoming Golden Week holidays in Japan next week, the prospect of a low liquidity environment emerges. Any decision by authorities to intervene directly in the FX market would introduce further uncertainty, potentially complicating currency dynamics.  



Divergent BoJ-Fed policy expectations  


The Japanese Yen faces challenges in attracting buyers due to diverging expectations regarding monetary policies between the Bank of Japan (BoJ) and the Federal Reserve. Despite a generally positive risk sentiment, concerns about potential intervention by Japanese authorities are curbing further declines for the JPY. Caution is being exercised as the week approaches significant central bank events and the release of key US economic data later in the week.  


As the Asian session progresses on Wednesday, the Japanese Yen remains close to a multi-decade low against the US Dollar. Market participants are adopting a wait-and-see approach, particularly in anticipation of the crucial Bank of Japan policy decision scheduled for Friday. Additionally, investors are gearing up for the release of the Advance Q1 GDP report and the Personal Consumption Expenditures (PCE) Price Index from the US on Thursday and Friday, respectively. These events are poised to have a significant impact on the near-term trajectory of the USD/JPY pair.  


Market sentiment continues to be influenced by expectations of a wide interest rate gap between the US and Japan, dampening the safe-haven appeal of the JPY amid a positive risk environment. However, speculation about any potential intervention by Japanese authorities is dissuading aggressive bearish positions on the JPY. Furthermore, while the US Dollar is hovering near recent lows following disappointing US PMI data, bullish expectations surrounding the Federal Reserve’s monetary policy are providing support and limiting downward pressure on the USD/JPY pair.  


In other developments, easing tensions in the Middle East are bolstering overall market sentiment and further diminishing the safe-haven allure of the JPY. Despite positive news regarding wage increases and labor shortages in Japan, the impact on the JPY remains subdued.  


As market participants await the outcome of the BoJ policy meeting and key US economic data releases, they are closely monitoring the trajectory of the USD/JPY pair amidst evolving market dynamics. Attention is shifting to Wednesday’s release of US Durable Goods Orders data, followed by the much-anticipated Q1 GDP and PCE Price Index reports.  



Further Outlooks on the JPY  


The upcoming monetary policy decision from the Bank of Japan scheduled for Friday is anticipated to be a focal point for financial markets. While it’s widely expected that the central bank will maintain its current policy setting, investors are keenly awaiting the post-decision commentary for any potential shifts in ton or forward guidance. However, without substantial guidance beyond monitoring the exchange rate closely, the Japanese Yen is poised to sustain its weakened stance.  


In tandem with the BoJ announcement, this week also brings forth three pivotal data releases from the United States. These include durable goods orders, the initial glimpse at Q1 GDP growth, and the latest Core Personal Consumption Expenditures (PCE) reading.   


While forecasts suggest a slowdown in US economic expansion, the underlying strength remains palpable. Notably, any significant movements in the Core PCE index could potentially afford the Federal Reserve some room for manoeuvring, paving the way for rate cuts later in the year. As investors digest these data points, they are likely to recalibrate their expectations regarding future Fed policy actions, thereby influencing market sentiment and pricing dynamics. 

 

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