• JPY jump. USD weaker as Japanese officials intervene to prop up the very weak JPY. This & positive sentiment boosted the AUD & NZD.
• Macro trends. Further bouts of JPY intervention possible. US GDP re-accelerates. BoE & ECB hold rates steady, but ECB hints at future hikes.
Global Trends
A few push-pull forces washed through markets overnight with risk sentiment generally improving at the end of the month. European and US equities rose with the S&P500 (+1%) recording its best month since late 2020 (+10.4% in April). Elsewhere, bond yields gave back ground with 2yr rates across the UK, Europe, and US shedding ~8-11bps. In FX the USD weakened largely on the back of the decision by Japanese officials to step in and prop up the weak yen. USD/JPY is the second most traded currency pair, so the ~2.4% drop had a cascading impact across FX markets (now ~156.63). EUR edged up (now ~$1.1735), GBP appreciated (now ~$1.3608), and cyclical currencies like the NZD (+1.4% to ~$0.5909) and AUD (+1.2% to ~$0.7201) outperformed.
The US/Iran conflict remains in a stalemate, and while brent crude oil futures fell sharply this was a function of the impending expiry of derivatives contracts, prices in the spot/physical market remain elevated. Macro wise, US GDP growth reaccelerated in Q1 as the government shutdown drag on activity at the end of last year unwound, however the ~2% annualised pace was a bit below consensus predictions. After yesterday’s ‘hawkish’ tilt by the US Fed, the Bank of England and European Central Bank both kept rates on hold with policymakers keeping a close eye on developments in the Middle East because of the growth and inflation consequences. That said, the ECB seems to have less patience than the BoE as it believes risks have ‘intensified’. Indeed, according to ECB President Lagarde, based on where rates are, “directionally, I know where we’re heading”, supporting the case for hikes to be on the table in coming months, in our opinion.
In terms of FX, after issuing a few harsh warnings such as informing speculators this is a “final advisory if you want to escape”, Japanese officials intervened in markets (i.e. bought the JPY) for the first time since mid-2024. As our chart shows, the JPY trade-weighted index (which is more economically important than USD/JPY) is at historically low levels with the weaker JPY something that can worsen inflation trends in Japan due to higher imported prices. Intermittent bouts of FX intervention, particularly episodes aimed at boosting a currency, don’t typically have a lasting impact as policymaker ‘firepower’ is constrained by the size of a nation’s FX reserve war chest. However, it can create more two-way risk in a currency and dampen short-term speculative trading behaviour. Near-term, we feel another bout of FX intervention is possible (historically it has tended to occur in multiple bouts). Over the medium-term we remain of the view that the undervalued JPY should strength as Japan’s inflation pulse forces the BoJ’s hand to raise rates further, Japan’s trade position improves once the conflict in the Middle East settles and energy prices stabilise, and/or higher returns on offer domestically reduces offshore capital outflows from Japan.
Trans-Tasman Zone
The improvement in risk appetite, as illustrated by the increase in offshore equites at the end of the month, coupled with the weaker USD stemming in large part from the FX intervention by Japanese officials to support the JPY, boosted the NZD and AUD (see above). At ~$0.5909 the NZD is back above its 1-year average, while the AUD (now ~$0.7201) is tracking around the upper end of the wide range it has occupied since mid-2022. The backdrop has also helped the AUD outperform on a few major cross-rates with gains recorded against EUR (+0.7%), GBP (+0.2%), and CNH (+1% to ~4.9194, just shy of its 1-year peak). By contrast, the bout of JPY strength has seen AUD/JPY fall (-1.2%), although it remains at historically elevated levels (see chart below).
Medium-term we believe AUD/JPY (much like USD/JPY) should trade at lower levels, this is due to our thoughts that the JPY is undervalued compared to a range of fundamental drivers. Moreover, we think short-term focused/momentum following markets are misreading the economic situation in Japan and underestimating the BoJ’s resolve to tackle inflation.
From the AUD side of the equation, as outlined previously, we feel that domestic and offshore forces could progressively turn into headwinds. The quickening in Australian inflation because of the surge in fuel prices and second round effects on areas such as travel, logistics, construction etc should be a ‘known known’ and while it points to the RBA tighten policy further over coming months this is largely factored in. Another RBA interest rate hike on 5 May is assigned a ~75% chance, with ~69bps of tightening baked in by next March. Higher Australian interest rates support a higher average level for the AUD relative to the past few years (recall the AUD averaged ~$0.6524 over 2024/25), but not necessarily more AUD upside, in our opinion. We don’t believe the looming growth hit from petrol prices and interest rates has been given that much thought by FX participants. Neither have the global growth challenges generated by the Middle East conflict, particularly on activity across Asia. This shaky growth environment could act as a ceiling on the AUD and progressively take some of the heat out of the currency down the track, especially as it is tracking ~2.0% above our ‘fair value’ estimates and positioning (as measured by CFTC futures) is ‘net long’.
