USD/JPY: curve inversion taking over?
While the FOMC Minutes showed that a substantial majority of FOMC members
thought it would likely soon be appropriate to reduce the pace of rate hikes, they
also pointed to various members believing the terminal rate was somewhat higher
than previously expected. This rhetoric echoed that of Chair Jerome Powell in his
post-meeting press conference as well as other FOMC members since the
meeting. The Fed staff also saw the possibility of recession over the next year as
almost as likely as a baseline forecast. USD/JPY declined on this rhetoric and we
note that the US 2-10sY spread has dipped further and to -80bp as the risk of US
recession is seen as growing. While the US-Japan short-term rates differential
remains the strongest driver of USD/JPY according to our FAST FX model of the
exchange rate, the US-Japan box yield spread is beginning to have a larger impact
as the UST curve further inverts. With the market pricing in a Fed Funds terminal
rate of around 5%, there is significant risk of this pricing being forced to move
higher and take the USD/JPY along with it, however, especially if inflation remains
sticky to the upside. With the US on holiday for Thanksgiving, USD/JPY may
quieten down a little. Investors will be wary of the Tokyo CPI data on Friday and
any upside surprise in the data given its strong correlation with the nationwide
inflation data. Further modest acceleration in Tokyo inflation is expected, which will
place equally modest pressure on the BoJ to relinquish its YCC.
©Crédit Agricole Securities (USA)
As traders, we need to be aware of the lows from 15th November. A break through there and we have a much larger drop.
While the FOMC Minutes showed that a substantial majority of FOMC members
thought it would likely soon be appropriate to reduce the pace of rate hikes, they
also pointed to various members believing the terminal rate was somewhat higher
than previously expected. This rhetoric echoed that of Chair Jerome Powell in his
post-meeting press conference as well as other FOMC members since the
meeting. The Fed staff also saw the possibility of recession over the next year as
almost as likely as a baseline forecast. USD/JPY declined on this rhetoric and we
note that the US 2-10sY spread has dipped further and to -80bp as the risk of US
recession is seen as growing. While the US-Japan short-term rates differential
remains the strongest driver of USD/JPY according to our FAST FX model of the
exchange rate, the US-Japan box yield spread is beginning to have a larger impact
as the UST curve further inverts. With the market pricing in a Fed Funds terminal
rate of around 5%, there is significant risk of this pricing being forced to move
higher and take the USD/JPY along with it, however, especially if inflation remains
sticky to the upside. With the US on holiday for Thanksgiving, USD/JPY may
quieten down a little. Investors will be wary of the Tokyo CPI data on Friday and
any upside surprise in the data given its strong correlation with the nationwide
inflation data. Further modest acceleration in Tokyo inflation is expected, which will
place equally modest pressure on the BoJ to relinquish its YCC.
©Crédit Agricole Securities (USA)
As traders, we need to be aware of the lows from 15th November. A break through there and we have a much larger drop.
Trade closed: stop reached
