CNH: USD/CNY Fixing Close To Steady

The US bank has revised higher its USD/JPY forecast profile, see below for more details. The biggest negative for the yen will be the continued benign macro environment.

Goldman Sachs: "Not with a bang, but with a whimper; Revising our USD/JPY forecast. The Bank of Japan hiked rates for the first time in 17 years, and for just the fourth time since the introduction of the zero interest rate policy in 1999. While this marks another giant leap for the BoJ, we think it is a small step for the Yen, and one that is likely too tentative to overcome the broader macro backdrop. Fundamentally, as we discussed last week, we do not think the BoJ’s actions will prompt significant repatriation from Japan-based investors—that would need to come from a change in the returns available abroad. But, we also do not expect careful Fed cuts driven by cooler inflation to boost the Yen. If anything, the anticipation of adjustment cuts has reduced the probability of the recession risks that tend to activate the Yen’s safe-haven appeal, so we do not expect any compression in the forward rate differentials that tend to matter for JPY, even as the policy rate differential narrows a bit. While we expect Japan policy to continue to be sensitive to the exchange rate, it remains the case that the benign macro risk environment should weigh on the Yen over time. Given the recent changes in our Fed forecast, coinciding revisions to our US fixed income forecasts, and the relatively careful BoJ policy communication, we are shifting our USD/JPY forecast path higher again. We now expect USD/JPY to trade around 155, 150, and 145 in 3, 6 and 12 months (vs 145, 142 and 140 previously)."

The US bank notes AUD is underperforming relative to the positive broader risk backdrop YTD. China concerns/equity weakness have been an offset, see below for more details.

Goldman Sachs: Space AUDity. Financial conditions have eased year-to-date, led lower by rising equity prices. Usually, AUD outperforms in this type of environment—positive growth repricing typically benefits pro-cyclical currencies—but that typical strength has not materialized this year. Instead the currency has unexpectedly weakened versus the Dollar. We have shown that negative sentiment on China has weighed on AUD in recent months, and this still seems to be the case. The correlation between Chinese equity performance and AUD returns remains elevated and continues to explain a meaningful portion of AUD performance. However, AUD is now also underperforming its beta to US equities, similar to NOK (see NOK bullet). Both of these factors have kept AUD under pressure, despite the favorable pro-cyclical environment. Meanwhile, monetary policy seems like a less relevant driver of currency performance. The RBA shifted to a neutral policy stance this week, placing itself more squarely in the middle of the pack of G10 central banks. Under ordinary circumstances, we would expect to see AUD outperforming, but with its usual beta to equities unusually depressed and China worries still top of mind with investors, it may take some time before AUD starts to react in line with historical performance.

The early impetus in JGB futures (JBM4) has been to the topside, although we haven't been able to breach the 145.70 level. We were last at 145.68, +.28.

• Positive spill over is evident from US futures, with the 10yr up to recent highs at 110.29+ +05+. The broader back drop around core yields has been to soften post recent dovish central bank tilts from the SNB and BOE (late last week).
• Cash JGB yields are mostly lower, although more so at the back end. The 10yr is off around 1.5bps to 0.726%. The 2yr is only down a touch, last at 0.202%. The 10yr swap rate was last at 0.86%, off by around 1.5bps as well.
• We have had the BoJ Jan minutes released, but they are largely superseded by actions at last week's Mar policy meeting, where NIRP was exited.
• They noted the risks of not moving soon in terms of rates could mean more aggressive action later on. They also noted that easy conditions, along with bond buying, would be maintained if exit from NIRP was delivered.
• Note we also have the enhanced liquidity auction later as well for the 1-5yr tenor.