From Thursday’s close, the dollar/yen exchange rate had jumped as much as 2.8% – with implied overnight volatility in the currency options market topping 17% for the first time this year. And even though the yen bounced hard on 160 to sit just under 156 in London, it remains weaker than it was when trading kicked off on Friday.
Japan’s seeming ‘benign neglect’ of the currency, as Deutsche Bank described it last week, is understandable given domestic inflation is largely under wraps, the move is largely driven by interest rate fundamentals and it’s flattering for Japanese exports and tourism.
But its spur to dollar-denominated energy import prices and a potential disturbance of the competitive landscape across Asia’s big exporting nations means the Japanese authorities will likely not want this move to get out of hand.
And yet this week is dominated by one of the major drivers – an increasingly hawkish Federal Reserve that meets again on Tuesday and Wednesday amid ebbing hopes for more than one U.S. interest rate cut this year.
After a series of sticky inflation readings this year, only 35 basis points of Fed easing is now priced for the entire year. The March release of the Fed’s favored PCE inflation gauge calmed markets a bit as it came in line with forecasts and showed no further deterioration of the early-year price picture.
But it’s done little to change the policy outlook – with this week’s Fed signaling likely to remain non-committal while perhaps nodding to discussions on slowing its balance sheet reduction.
That may be welcomed by the increasingly agitated Treasury market – where 10-year yields returned last week to the danger zone of October/November and the so-called ‘term premium’ demanded by investors for long-term risks also flipped positive for the first time this year.
Yields slipped back a touch on Monday, with the Treasury this week publishing refunding plans for the coming quarter and expected on Monday to outline borrowing estimates for the two quarters ahead.
Most auction sizes are expected to remain unchanged, as it has already promised, but much of the attention may be on a likely bond buy back program.
