Shifting Attention to BOC Policy Update Following Increased FX Volatility Triggered by BOJ

The US dollar, a prominent player, recently hit a high at 103.82, creating a buzz in the market. However, this ascent wasn't sustained, and the dollar retraced some of its gains overnight. The lack of a clear trigger for this rise, coupled with the absence of support from US yields, has injected a degree of uncertainty into the currency market.

DXY (USD Index)

Source: Finlogix

The Bank of Japan (BoJ) further contributed to the volatility with its recent policy update. While the yen initially rallied, the surge proved short-lived. USD/JPY experienced a notable swing, retracing from a low of 146.99 to a high of 148.70 post the BoJ update. Speculation is rife about the BoJ potentially abandoning its negative rate policy in April, mirroring the upward trend in Japanese yields akin to the US. However, the impact is somewhat muddled due to the recent shifts in the US yield curve.

USDJPY

Source: Finlogix

China, a key player in the global economic arena, is contemplating measures to stabilize its stock market. Reports suggest the mobilization of funds from offshore accounts of Chinese state-owned enterprises, aiming to purchase shares through the Hong Kong exchange link. While unconfirmed, this development underscores growing concerns about China's economic health, contributing to the underperformance of Asian currencies in 2024.

To stimulate growth, the People's Bank of China (PBoC) announced a cut in the reserve required ratio on February 5th, injecting approximately CNY1 trillion into the economy. This move reflects ongoing efforts to navigate economic challenges and sustain momentum.

The dollar's recent resurgence, in the wake of China's reported stock support fading during London trading, has raised eyebrows. The Hang Seng's positive momentum contrasts with the relatively subdued performance of European and US equities. The lack of a clear catalyst for the dollar's surge prompted an overnight correction, adding an element of unpredictability to the current market dynamics.

The US Republican Primaries are also influencing currency markets, with the Mexican peso signalling potential shifts. The recent endorsement of Donald Trump by Ron DeSantis and Trump's victory in the New Hampshire primary are casting doubt on other candidates, notably Nikki Haley. While premature, these events, coupled with Banxico's potential entry into a rate-cutting cycle, may contribute to keeping the peso soft. However, market dynamics suggest a two-way movement for the peso, with anticipated demand driven by its appealing carry and the prevailing belief in a US dollar decline.

Today's focal point is the S&P Global PMIs across developed countries. Despite the ISM remaining a primary reference, markets are showing increased sensitivity to this US survey. Expectations include a marginal decline in manufacturing PMIs and a stabilizing performance in services. The short-term outlook for the dollar isn't strongly bearish, yet recent moves appear somewhat exaggerated. Although rate cuts are priced into the market for this year, a sustained dollar rebound would likely require an uptick in short-term Treasury yields.

In conclusion, the intricate dance of global financial markets continues, influenced by a myriad of factors. The intersection of monetary policies, political developments, and economic indicators creates a tapestry that market participants must navigate with vigilance and adaptability.

Acknowledgments: This research draws upon insights from reports by MUFG and ING.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.