Where are the Yen bulls?

We expected – at the start of this year – that March would bring a Fed rate cut. It brought a BoJ rate hike instead.

Yes, the Bank of Japan (BoJ) scrapped its negative rate policy, raised the rates from -0.10% to 0%, ditched its YCC policy and ended the purchases of ETF and Japanese real estate investment trusts. However, the bank said that it will continue to purchase sovereign bonds with ‘broadly the same amount’ and that the policy will remain accommodative for now. The latter caught traders attention more than the rest. While you would’ve clearly expected to see the Japanese 10-year yield and the yen to rally on the back of such hawkish shift, the USDJPY spiked above 150, the EURJPY rallied past 163 and the 10-year JGB yield is down by almost 3.5%.

The price action suggests a ‘one and done’ action from the BoJ. Governor Ueda hasn’t spoken just yet, but if he doesn’t say that the BoJ will continue to hike rates, the yen bulls will apparently not come back. Note that today’s decision was supposed to send the yen on a rising path. At this point, I don’t see what would make long the yen the best trade of the year.

Elsewhere, the Reserve Bank of Australia (RBA) maintained rates unchanged at today’s policy meeting, as expected, and the AUDUSD fell sharply below the 200-DMA. The dollar index, on the other hand, extended gains above the 50-DMA and jumped above the downtrending channel top of February and March. The hawkish Federal Reserve (Fed) expectations sent the US 2-year yield to 4.75% in the run up to this week’s Fed meeting. FOMC starts its two-day meeting today and announce their latest decision tomorrow. The Fed is not expected to change the rates at this week’s meeting, hence all eyes are on the dot plot with the expectation of fewer rate cuts this year than previously plotted. The Fed can’t start cutting rates when there is no reason to do so: inflation is showing signs of heating up, economic growth is above average, jobs market remains healthy and corporate earnings are robust. There is a chance that we see the median forecast fall to 2 cuts this year from 3 plotted in December. We will also be listening carefully to the Fed’s plans about its QT: whether they will slow the unwinding of the balance sheet or they won’t. I think they’d better not unwind QT to balance out the expansive fiscal stimulus into the November election. Otherwise, inflation will hardly fade away. From a market perspective, a hawkish Fed this week – which we expect to see - we will likely help the US dollar and the yields trend higher.

While the yields and the dollar were rising, the S&P500 was also rising, led by technology stocks. Nasdaq 100 closed Monday’s session 1% higher. Tesla gained more than 6% after it announced a price hike for its Model Y in the US and Europe, effective from this Friday. Apple gained and Google jumped on news that Apple considers integrating Google’s Gemini AI into the iPhone. The deal would give Gemini a monstrous reach. For Apple, on the other hand, feelings are mixed. Having AI on iPhones will be fun and should boost iPhone demand. But the fact that the company is looking to use a tool developed by Google is yet another confirmation that they’ve missed the AI train and that’s not necessarily good news for a technology giant that navigates today’s conditions of ‘AI or die’.

For once, the AI king Nvidia remained under a shadow yesterday, even after the company unveiled at its GTC conference its new and faster chip that would better handle training and running of AI models. But Nvidia fell 1.77% in the afterhours trading. If the brand-new Blackwell chip didn’t trigger a fresh rally, it’s because the arrival of a new and a more powerful chip was already priced in. But if Nvidia bulls didn’t take the opportunity to send the price higher, it’s maybe because the rally is coming to an exhaustion into the $1000 per share mark…

In energy, US crude rallied past the $82pb on Monday on news that Ukraine continued its attacks on Russian refineries. The barrel of US crude flirted with the $83pb and is trading at around $82.50pb at the time of writing. Geopolitical tensions and IEA’s forecast that supply will be in deficit this year amid the extension of OPEC supply cuts remain supportive of the bulls. A sustainable rise above $82pb should pave the way to $85pb. The major short-term risk is a hawkish shift from the Fed that could spoil global demand expectations and limit the topside.