Few surprises from Bank of Japan, USD/JPY peak in sight! New Zealand recession raises dovish expectations, and NZD rates unlikely to rise

JPY: It's a "skip" from the BoJ too

We don’t expect real surprises from the Bank of Japan policy announcement overnight. We recently withdrew our views on the adjustment of the yield curve control policy in June, following some firmly dovish comments by BoJ officials. Still, with little-to-nothing being priced in terms of a hawkish surprise, the downside risks for JPY also appear limited.

Our economics team continues to see good chances that the BoJ will make some changes to its YCC policy at the end of July – although the Fed decisions will admittedly play an important role. Incidentally, further USD/JPY strength (possibly driven by carry trade strategies) may well lead Japanese authorities to restart FX intervention, which was deployed around the 145 area last September. We may not be far from the peak in USD/JPY, even though a reversal of the bullish trend may take some time.

 

Elsewhere in G10, we saw New Zealand enter a recession after a 0.1% contraction in 1Q, with the impact of Cyclone Gabrielle having impacted activity without causing a material jump in inflation (which surprised on the downside in 1Q). It remains to be seen whether the government’s spending boost will prevent the recession from proving to be the norm for the rest of the year. For now, the figures all but endorse the recent dovish turn by the Reserve Bank of New Zealand, and a repricing higher in NZD rates looks unlikely before the 12 July policy meeting.

 

Australia’s May jobs numbers moved diametrically in the opposite direction than the April release, showing a huge increase in hiring (75.9k) almost entirely driven by full-time employment (61.7k). The unemployment rate inched lower to 3.6%, and markets now fully price in two more rate hikes by the Reserve Bank of Australia.

 

The Australian yield curve inverted for the first time since 2008 after the release, as 2-year yields jumped 10bp. Although this is a sign of a coming recession, a domestic inverted yield curve is not a bad sign for a currency in the near term: the question is whether the RBA will match the hawkish market expectations on tightening.

We are not fully convinced as inflation may prove less resilient than markets are thinking, but AUD understandably remains one of the pro-cyclicals of choice at the moment.