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FxWirePro: Spotlight on Fed and BoJ in H2’2019, Uphold USD/JPY short hedges
USDJPY is dipping below 108.250 level to wrap up this week. As we head into the next week, major central banks (BoJ and Fed) are center of attraction as they are scheduled for their monetary policies, on Wednesday, and there is a higher-than-usual degree of uncertainty.
The central banks put are starting to knock in. Responding to a deteriorating global economic outlook and rising event risks (largely from US trade policy), the key Fed/ECB/BOJ/PBOC officials have lately spoken of their readiness and the room to step up on monetary accommodation. ‘Can BoJ be open for policy change or most likely to maintain negative rates on hold’ is the interesting question. The BoJ would be in focus for now and we expect them to follow in the footsteps of other DM central banks and turn more dovish, which should still be conducive of selling USDJPY downside.
On the flip side, we expect the Fed to initiate 75bp of precautionary rate cuts this year, beginning with a 50bp reduction in July, followed by a 25bp reduction in September. We based this call on the evidence of an industrial slowdown, increased trade tensions, and soft inflation. The monetary policy stance is likely too restrictive given increased headwinds since the committee halted its cycle in December.
The USD may initially rally if the constellation of events fails to meet the market's high bar for a dovish delivery, though we'd fade any rally. A formal signal in the FOMC statement of the Fed's attentiveness and reactivity to a deterioration in the outlook, perhaps driven by trade tensions, would suggest the market pricing in a greater risk premium for lower rates, which would be USD negative.
Short-term USD gains on a hawkish surprise are likely to generate further long-term USD pain over time. A stronger USD is a headwind to global growth and trade volumes, which should eventually feed back into the US growth outlook. It also tightens financial conditions and creates headwinds to US risk assets. The tighter financial conditions get now, the looser the Fed may need to be later on in response.
USDJPY fell from 112.166 to the recent lows of 107.815 levels, the defensive yen has been the top performer of the day. We feel quite fortunate to be exiting in the black having owned USDJPY through a deep and sometimes volatile correction in US stocks.
Hence, on hedging grounds ahead of Fed and BoJ’s monetary policies that are scheduled for the next week, shorting USDJPY futures contracts of mid-month tenors have been advocated, we now like to uphold the same positions as the underlying spot FX likely to target southwards below 106 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: DBS & Commerzbank
Currency Strength Index: FxWirePro's hourly JPY spot index is inching towards 128 levels (which is highly bullish), and hourly USD spot index has bearish index is creeping at 83 (bullish) while articulating (at 07:38 GMT).
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