Today’s market dynamics point to a possible rally in the USD/JPY pair. Throughout May, the dollar showed weakness, as risk appetite rose and expectations of an easing of Federal Reserve policy increased. However, markets are now looking for a new catalyst beyond data to spur big moves.
This week, weak numbers are expected for existing home sales and durable goods orders, in line with the general consensus. In addition, the S&P PMIs scheduled for Thursday are expected to be weak and considered less relevant compared to the ISM surveys.
The minutes from the May 1 Federal Open Market Committee (FOMC) meeting were expected to be clear. The meeting did not meet the expectations of those expecting a more aggressive stance, but since then, members such as Neel Kashkari have indicated the possibility of another rate hike if necessary. The primary focus of the minutes is likely to be the committee’s reasoning behind its generally optimistic forecast of lower inflation, which could influence the relationship between future economic data and monetary policy.
Unless there are unexpected indications of interest rate increases or a significantly pessimistic view within the Committee, the direct impact on the foreign exchange market is expected to be minimal. A period of low volatility and a “wait and see” approach is expected until the core personal consumption expenditures (PCE) price index is released on May 31. The DXY is expected to stabilize between 104 and 105 this week, with a slight upward bias as the market continues to reflect the rise seen in pro-cyclical currencies after the CPI.
Additional upward pressure on the dollar may come from tightening in the oil market following the death of Iranian President Ebrahim Raisi in a helicopter accident and health concerns related to Saudi King Salman bin Abdulaziz. However, the impact of these events in the Middle East on the market has been limited so far.
Japanese Yen and AUD/JPY market performance amid risk aversion
In a low-volatility market, the yen generally underperforms as carry trades financed in yen become more attractive. Recent CFTC data indicates that selling of the Japanese yen represents 42% of open interest, down from 54% last month. This trend reflects market doubts about the effectiveness of interventions in the Japanese currency, further complicating expectations for a USD/JPY peak. Analysts expect a return to the 156.50 level that we saw before the US Consumer Price Index data was released earlier this week.
AUD/JPY fell amid interest rate decisions
The AUD/JPY pair saw intraday gains pared, trading around 104.20 during the European session on Monday due to the prevailing risk off sentiment. Earlier in the day, the Australian dollar initially rose but later pared its gains following China’s decision to maintain interest rates. The People’s Bank of China kept interest rates on one-year and five-year loans steady at 3.45% and 3.95%, respectively. Traders are now looking forward to the minutes of the Reserve Bank of Australia (RBA) meeting, scheduled for release on Tuesday.
The Australian dollar faces challenges as the 10-year Australian government bond yield hovers near a one-month low of around 4.2%. The decline comes on the heels of a weak first-quarter domestic jobs report and slowing wage growth, which dampened market expectations for a rate hike by the Reserve Bank of Australia.
On the Japanese Yen front, the large interest rate differential between Japan and other countries is putting selling pressure on the Japanese Yen, thus strengthening the AUD/JPY. The Bank of Japan (BoJ) ended its negative interest rate policy in March, and traders are anticipating a possible decline in bond purchases at the BOJ’s policy meeting in June.
The impact of the Bank of Japan’s policy on companies
A recent study by the Bank of Japan revealed that major Japanese manufacturers prioritize exchange rate stability in the central bank’s monetary policy. Nearly 70 percent of the companies surveyed reported negative effects of the Bank of Japan’s 25-year-old monetary easing measures, especially the weak yen, which increased import costs. Conversely, about 90 percent recognized the benefits of prolonged easing, such as lower borrowing costs. The survey, which surveyed nearly 2,500 companies nationwide, underscores the crucial role that yen movements play in shaping companies’ assessments of monetary policy. In addition, many companies have indicated that they can no longer attract enough workers if wage growth remains stagnant, preferring an economy in which both wages and inflation rise to one with minimal changes in wages and prices.
The Bank of Japan’s latest survey, part of a comprehensive review of past monetary easing policies, suggests major imminent changes in corporate behavior. Nearly 90% of companies expressed a strong willingness to raise wages significantly to alleviate labor shortages, while more than 80% reported that they found it easier to raise prices. These results support the bank’s view that continued rising wages and prices will help keep inflation near its 2% target, facilitating potential increases in interest rates from current near-zero levels.
In March, the Bank of Japan ended eight years of negative interest rates and other aggressive monetary measures, signaling a pivot away from prolonged hyper-easy policy. However, this shift has not stopped the yen’s decline, which continues to affect consumption by raising the costs of imported goods. Market attention remains focused on the large interest rate differential between Japan and the United States.
