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Stocks gave back all of yesterday’s gains and a bit more, with the S&P 500 finishing the day lower just over 1%. Tonight, the FX market will start to get really interesting, with the BOJ rate decision around 11 to 12 PM EDT. More important than the decision will be the read-through for the future path for policy, and then Governor Ueda’s press conference will follow.
Of course, tomorrow at 2 PM ET, we get the FOMC meeting decision, the Summary of Economic Projections, and then the Powell presser. That leaves the USDJPY in the crosshairs, and really, the path for the USDJPY couldn’t be more two-way. You can flip a coin at this point to call the direction.
However, when looking at the spread between the US 10-year and the 10-year JGB, the bias appears to suggest that the spread continues to narrow; it certainly looks like some kind of bear pennant has formed in the chart.
If the spread narrows further, it would suggest that the USDJPY falls, meaning that the Yen strengthens since the two track each other almost perfectly.
The BOJ has had plenty of opportunities to counter the rising 10-year JGB yield recently, but it has opted not to counter the higher yields. If the BOJ is really serious about a 1% neutral rate, then I’d think that, given their 4% inflation rate, the 10-year rate should be significantly higher than it is today.
So we go back to the USDJPY, and if material strengthening occurs, then I think it will mean that the carry trade continues to unwind.
Of course, we won’t know the actual outcomes until Wednesday evening, after the Fed’s meeting, because we must wait and see what Powell & Co. has to say. So, being patient may be the best bet until outcomes become clear.
-Mike
Terms by ChataGPT:
1. FX Market (Foreign Exchange Market) – The global decentralized marketplace for trading currencies, where exchange rates fluctuate based on macroeconomic factors, interest rate differentials, and geopolitical events.
2.BOJ (Bank of Japan) Rate Decision – The monetary policy announcement by Japan’s central bank, influencing JPY liquidity, yield curve control, and global carry trades.
3.Read-Through – The market’s interpretation of an event’s broader implications, such as how the BOJ’s decision signals future policy shifts.
4.Governor Ueda’s Press Conference – A key event where BOJ Governor Kazuo Ueda provides guidance on policy direction, impacting market expectations for rate hikes or continued stimulus.
5.FOMC (Federal Open Market Committee) Meeting Decision – The U.S. Federal Reserve’s policy announcement, setting short-term interest rates and shaping global monetary conditions.
6.Summary of Economic Projections (SEP) – A quarterly FOMC report outlining projections for GDP growth, inflation, unemployment, and the future path of interest rates (dot plot).
7.Powell Presser (Press Conference) – Fed Chair Jerome Powell’s post-meeting Q&A, where his tone and language often drive market volatility more than the actual rate decision.
8.USDJPY in the Crosshairs – A phrase indicating that the USD/JPY exchange rate is at a critical juncture, with major catalysts ahead.
9.Spread Between US 10-Year and 10-Year JGB – The interest rate differential between U.S. Treasuries and Japanese government bonds, a key driver of capital flows and JPY strength/weakness.
10.Bear Pennant Formation – A bearish technical analysis pattern where a consolidation phase after a sharp decline suggests further downside.
11.Narrowing Spread – A situation where the yield differential between U.S. and Japanese bonds shrinks, typically leading to a stronger JPY and weaker USDJPY.
12.BOJ Yield Management – The BOJ’s approach to controlling JGB yields through bond purchases, affecting interest rate expectations and currency valuations.
13.1% Neutral Rate – The theoretical interest rate at which the BOJ’s policy neither stimulates nor restricts economic growth, currently in focus given Japan’s inflation dynamics.
14.Carry Trade Unwind – The process where investors close leveraged positions in high-yielding currencies (USD) against low-yielding ones (JPY), leading to JPY appreciation.
15.Waiting for Powell & Co. – A reference to market participants holding off on major moves until after the Fed’s decision and Powell’s remarks clarify policy direction.
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