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Focus On USDJPY Recovery Ahead of Fed & BOJ Next Week

FOREX
  • Broad JPY weakness was the key theme across major currency markets on Friday. Concurrent BoJ sources reports raising expectations that the BoJ's yield curve control programme will be unchanged at next Friday's decision substantially weighed on the Yen. Both Bloomberg and Reuters cited sources in reporting that the board were leaning toward no change in approach, countering recent building speculation that a policy switch would be imminent.
  • USDJPY (+1.12%) rallied solidly on the headlines, rising well through the recent highs to trade at the best levels since July 10th, briefly peaking at 141.96. JPY implied vols are well bid, with the one-week contract now capturing the BoJ decision and crossing 16 points to trade at the best levels since March.
  • Weakness for Antipodean FX was also notable with both NZD and AUD rivalling the Yen as the weakest performers across G10. NZDUSD looks set to extend its losing streak to six trading sessions as the greenback continues to recover. Notably, the pair has now erased the entirety of the post US CPI inspired rally and now sits back below the 50 day exponential moving average, which intersected today around the 0.6200 handle.
  • The main focus next week will be on the Fed meeting/decision. The FOMC is firmly expected to hike by 25 basis points and maintain its tightening bias at the July meeting. Chair Powell is likely to suggest that a follow-up hike is possible at the next meeting in September, but will emphasize that no decision has yet been made, and will depend on the substantial inflation and jobs data in the interim. Both the ECB and BOJ decisions will follow the FOMC.
  • Over the weekend, attention will be on the Spanish parliamentary election before Monday’s release of European and US flash PMIs kick off the data docket.
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