Fresh USD/JPY Highs, CNH Benefits Marginally From PBoC Inaction (For Now)

Fresh cycle highs for USD/JPY supported the broader USD during Asia-Pac dealing, with the greenback sitting atop the G10 FX leader board after geopolitical tension and the need for continued Fed policy normalisation dominated news flow during the backend of Thursday’s NY hours. A reminder that liquidity is challenged owing to the observance of elongated weekends across many major global financial centres.

• Gotobi-linked demand surrounding the Tokyo fix was earmarked as a potential driver when it came to the latest leg higher in JPY crosses. USD/JPY has registered a fresh cycle high at Y126.56, with a Fibonacci projection (Y126.71) now providing the nearest point of technical resistance. Worry surrounding the potential for an EU ban or Russian oil imports supported oil in NY dealing and may have played into JPY weakness in early Tokyo trade, as local participants reacted to that move, as well as Thursday’s move higher in U.S. Tsy yields (a reminder that both the U.S. oil and Tsy markets are closed on Friday). The headwinds for the JPY are well documented, with central bank divergence (the BoJ continues to affirm its super dovish stance), yield differentials and Japan’s status as a notable net energy importer weighing on the JPY in recent weeks. USD/JPY is last +50 pips, just below Y126.40.
• USD/CNH has nudged lower in the wake of PBoC inaction re: MLF matters (no rate cut and a simple roll over of existing maturing MLF), although the move has been limited, with the cross sitting ~75 pips softer on the session, hovering around CNH6.3825. Market participants remain focused on the potential for a RRR cut from the PBoC, given recent guidance from the State Council on the matter, with the likelihood being that any such move will come after Beijing market hours (see earlier bullets for more colour on that matter).
• The combination of Thursday’s uptick in the DXY, bid in oil (with worries re: a potential impending EU embargo of Russian oil evident) and move higher for broader U.S. Tsy yields supported USD/KRW in Seoul dealing, with the rate last dealing up the best part of 6 figures at KRW1,230.40. News that South Korea will lift all COVID-19 social distancing rules, except a mask mandate, next week, failed to provide much in the way of meaningful support for the won. Meanwhile, equity market outflows (although not large) added some further pressure to the KRW.
• Focus remains squarely on the potential for an imminent PBoC RRR cut. Elsewhere, the latest professional forecasters survey from the ECB, U.S. industrial production, NY Fed manufacturing & French CPI data will cross on Friday.