FX Volatility Expected to Return as Central Bank Policies Diverge"
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FX volatility might be returning given Wall Street is seeing some exhaustion with several key currency trades. The end of tightening for the advance economies keeps getting delayed and sooner than later it will deliver a major blow to growth. FX volatility should pick up as diverging policies from the Fed, BOE, and PBOC could trigger some significant moves in H2.
USD/JPY
A lot of macro traders were expecting dollar strength to intensify against the Japanese yen as interest rate differentials appear likely to widen further over the next few months. The carry trade isn’t making a comeback given the rising prospects of a recession coming to the US. Everyone also remains on intervention watch from Japan’s Ministry of Finance, but expectations are for action if dollar-yen tests the 150 region. The consensus on Wall Street is that Japan will probably act, but it might not happen until after the summer. A tweak to yield curve control could trigger yen strength but that won’t happen until the BOJ’s price goal is achieved. BOJ Governor Ueda has been clear that no tweaks will occur until the prospects heighten for inflation to sustainably reach its 2% target.
USD/JPY weakness towards 140 has triggered some buyers and that might gain momentum if risk appetite can remain throughout tomorrow’s US inflation report (Wednesday 830am est). Further upside could eye a return to the 145 zone if risk aversion does not run wild post both Wednesday’s CPI reading and Friday’s bank earnings.
