USD/JPY: A move to 150 can not be ruled out – Rabobank

The pullback in the broad-based value of the USD in recent sessions has offered a reprieve to various stressed currency pairs, among them USD/JPY. Nonetheless, economists at Rabobank still believe that the pair could reach the 150 level.

Scope for USD/JPY to head higher in the coming months

“The dip back towards 142.00 this week will be welcomed by Japanese officials. That said, it is our view that USD strength will sustain for some months yet. It is also possible that the BoJ will maintain loose policy settings into next year. This suggests scope for USD/JPY to head higher in the coming months.”

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AUD/USD ascends to 0.6900 neighbourhood, nearly two-week high amid weaker USD

• AUD/USD builds on last week’s late bounce and gains traction for the second straight day.
• Retreating US bond yields, a positive risk tone undermines the USD and extends support.
• Recession fears might cap the risk-sensitive aussie ahead of the US CPI report on Tuesday.

The AUD/USD pair catches some bids for the successive straight day on Monday and builds on last week's bounce from sub-0.6700 levels or the lowest since July 14. This also marks the third day of a positive move in the previous four and lifts spot prices to a more than one-week high, closer to the 0.6900 mark during the mid-European session.

A combination of factors force the US dollar to prolong its recent sharp pullback from a two-decade high, which, in turn, is seen lending support to the AUD/USD pair. The markets already seem to have priced in a supersized 75 bps rate hike by the Federal Reserve at the next policy meeting on September 20-21. Furthermore, a modest downtick in the US Treasury bond yields seems to weigh on the greenback.

Apart from this, a generally positive tone around the equity markets further undermines the safe-haven buck and benefits the risk-sensitive aussie. That said, growing recession fears, amid the prospects for a faster policy tightening by major central banks and economic headwinds stemming from fresh COVID-19 curbs in China could cap optimism. This, in turn, warrants some caution for bullish traders.

Investors might also refrain from placing aggressive bets and prefer to move to the sidelines ahead of the latest US consumer inflation figures, due for release on Tuesday. The crucial US CPI report for August will play a key role in influencing the Fed's policy outlook. This will drive the USD demand in the near term and help determine the next leg of a directional move for the AUD/USD pair.

In the meantime, spot prices are more likely to consolidate in a range amid absent relevant market-moving economic releases from the US on Monday. That said, the US bond yields, along with the broader risk sentiment, might provide some impetus to the greenback and allow traders to grab short-term opportunities around the AUD/USD pair.

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 EUR/JPY Price Analysis: Correction lower could extend to 134.30

• EUR/JPY comes under pressure and approaches 137.00.
• The April lows around 134.30 emerge as the next support of note.

EUR/JPY adds to Friday’s retracement and revisits the vicinity of the 137.00 mark at the beginning of the week.

Further weakness should not be ruled out in the very near term. That said, the corrective move in the cross could extend further and retest the monthly lows around 134.30.

In the meantime, while above the 200-day SMA at 130.56, the outlook for the cross is expected to remain constructive.

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Russian companies, banks could reap windfall from depositary receipt delisting

Russian companies and global banks including BNY Mellon (NYSE:BK), Deutsche Bank (ETR:DBKGn), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) could profit if Moscow moves to de-list Russian companies' depositary receipts from foreign exchanges, according to two people familiar with the matter.

The potential windfall is due to the fees that bank issuers of depositary receipts can contractually charge investors when they cancel the product.

It is unclear how much companies and banks could make or if banks will charge the fees and risk angering investors who say it would be unfair given the extraordinary circumstances which have been triggered by Russia's invasion of Ukraine.

However, the fees could potentially translate into hundreds of millions of dollars according to Reuters' calculations based on fee data provided by the sources.

Assailed by Western sanctions, Moscow is preparing to de-list Russian company depositary receipts from foreign exchanges and convert them into local Russian securities in a bid to reduce foreigners' control over these companies.

Depositary receipts are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. They allow investors to dabble in overseas stocks in their own geography and time zone.

There are more than 30 depositary receipts on Russian companies including Gazprom (MCX:GAZP), Rosneft, Lukoil and Norilsk Nickel issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, trading on U.S. and European markets.

Under standard agreements, depositary receipts can be canceled by the issuer or the investor. When that happens, the investor typically gets cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.

Banks charge an administration fee, typically around $0.05 per receipt, which may be shared with the companies, two sources said.

If Moscow de-lists Russian depositary receipts, banks will have to cancel the products. Banks could still charge the fees, even though their hand was forced, according to three sources.

For example, an investor in Rosneft with 150 million depositary receipts representing the same number of shares in the company could be on the hook for $7.5 million in cancellation fees, according to Reuters' calculations.

Sweeping Western sanctions could make it challenging for banks to transfer the cash to some companies.

Regardless, some investors say the fees should not apply. One global asset manager told Reuters that if Russia passes the de-listing law there should be no fees as investors would have no choice in the matter. The other two sources, however, say banks still have to cover their costs.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup declined to comment. Russian companies did not respond to a Reuters emails seeking comment.

MARKET FREEZE

As Western sanctions pummeled Russian stocks from late February, the Moscow exchange closed and the Russian central bank banned foreigners from transferring shares out of their custody accounts. It also barred foreigners from selling Russian shares.

The restrictions made it nearly impossible for banks to cancel receipts when asked by investors anxious to slash their Russia exposure.

With curbs on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But because the foreign banks still can't sell the shares, investors have to take custody of them instead. To do that, investors need an account in Russia, which many don't have.

As a result, a lot of investors are likely to hold onto the receipts for the time being, according to three people.

Many investors are worried, however, about the de-listing bill which Russia is preparing.

Aside from the potential cancellation fees, investors are worried about what will happen if they can't open a local custody account.

In a note to clients, JPMorgan said clients may be able to open a Russian account under some unspecified circumstances if the new law is passed.

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Breaking: ECB leaves rates unchanged at -0.50% as expected, reiterates QE to end in Q3

The European Central Bank left its benchmark deposit rate unchanged at -0.50% on Thursday as unanimously expected by analysts. The central bank also reiterated its guidance that net asset purchases (Quantitative Easing or QE) should end in Q3. 

ECB Statement:

"Russia’s aggression in Ukraine is causing enormous suffering.

It is also affecting the economy, in Europe and beyond.

The conflict and the associated uncertainty are weighing heavily on the confidence of businesses and consumers.

Trade disruptions are leading to new shortages of materials and inputs.

Surging energy and commodity prices are reducing demand and holding back production.

How the economy develops will crucially depend on how the conflict evolves, on the impact of current sanctions and on possible further measures.

At the same time, economic activity is still being supported by the reopening of the economy after the crisis phase of the pandemic.

Inflation has increased significantly and will remain high over the coming months, mainly because of the sharp rise in energy costs.

Inflation pressures have intensified across many sectors.

At today’s meeting the Governing Council judged that the incoming data since its last meeting reinforce its expectation that net asset purchases under its asset purchase programme should be concluded in the third quarter.

Looking ahead, the ECB’s monetary policy will depend on the incoming data and the Governing Council’s evolving assessment of the outlook.

In the current conditions of high uncertainty, the Governing Council will maintain optionality, gradualism and flexibility in the conduct of monetary policy.

The Governing Council will take whatever action is needed to fulfil the ECB’s mandate to pursue price stability and to contribute to safeguarding financial stability.

Asset purchase programme (APP)

Monthly net purchases under the APP will amount to €40 billion in April, €30 billion in May and €20 billion in June.

The calibration of net purchases for the third quarter will be data-dependent and reflect the Governing Council’s evolving assessment of the outlook.

The Governing Council also intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the APP for an extended period of time past the date when it starts raising the key ECB interest rates and, in any case, for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

Key ECB interest rates

The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.50% respectively.

Any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual.

The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term.

Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term.

Pandemic emergency purchase programme (PEPP)

The Governing Council intends to reinvest the principal payments from maturing securities purchased under the PEPP until at least the end of 2024.

In any case, the future roll-off of the PEPP portfolio will be managed to avoid interference with the appropriate monetary policy stance.

In the event of renewed market fragmentation related to the pandemic, PEPP reinvestments can be adjusted flexibly across time, asset classes and jurisdictions at any time.

This could include purchasing bonds issued by the Hellenic Republic over and above rollovers of redemptions in order to avoid an interruption of purchases in that jurisdiction, which could impair the transmission of monetary policy to the Greek economy while it is still recovering from the fallout from the pandemic.

Net purchases under the PEPP could also be resumed, if necessary, to counter negative shocks related to the pandemic.

Refinancing operations

The Governing Council will continue to monitor bank funding conditions and ensure that the maturing of operations under the third series of targeted longer-term refinancing operations (TLTRO III) does not hamper the smooth transmission of its monetary policy.

The Governing Council will also regularly assess how targeted lending operations are contributing to its monetary policy stance.

As announced, it expects the special conditions applicable under TLTRO III to end in June this year.

The Governing Council will also assess the appropriate calibration of its two-tier system for reserve remuneration so that the negative interest rate policy does not limit banks’ intermediation capacity in an environment of ample excess liquidity.

The Governing Council stands ready to adjust all of its instruments within its mandate, incorporating flexibility if warranted, to ensure that inflation stabilises at its 2% target over the medium term.

The pandemic has shown that, under stressed conditions, flexibility in the design and conduct of asset purchases has helped to counter the impaired transmission of monetary policy and made the Governing Council’s efforts to achieve its goal more effective.

Within the Governing Council’s mandate, under stressed conditions, flexibility will remain an element of monetary policy whenever threats to monetary policy transmission jeopardise the attainment of price stability.

The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today."

Market Reaction

The euro saw a substantial drop in reaction to the latest ECB policy announcement. EUR/USD has dipped to around the 1.0875 area from around 1.0915 prior to the release and now trades with on the day losses of around 0.1% versus earlier gains of around 0.3%.  

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 Euro gains respite from Macron's French election lead

The euro looked set to snap a seven-day losing streak versus the dollar on Monday, as the single currency rallied after French leader Emmanuel Macron beat far right challenger Marine Le Pen in the country's first round of presidential voting.

Investor concerns about the future direction of the euro zone's second-biggest economy have weighed on the euro and added to worries over the economic costs of war in Ukraine.

Meanwhile, the dollar has been pushed higher by rising U.S. yields and expectations the Federal Reserve will act quickly to stem inflation. One of the big fallers has been the Japanese yen, which fell to a fresh seven-year low versus the dollar.

Macron will face Le Pen in what promises to be a tightly fought French presidential election runoff on April 24.

Nonetheless, Macron's lead in the first round provided some respite for the euro - lifting it by as much as three quarters of a percent in Asian trading hours to $1.0955. It was last up 0.3% at $1.09080.

Currency analysts said the contest remained on a knife-edge with negative implications for the euro.

"The narrower than expected victory for President Macron will keep alive fears that there is an outside chance that Le Pen can become president," analysts at MUFG said in a note.

"The first-round results and the opinion polls pointing towards a close result in the second round will remain a modest weight on the euro in the coming weeks."

The dollar index - which tracks the greenback against a basket of six peers - was broadly flat on the day, just shy of the 100 mark hit last week for the first time in nearly two years.

As the dollar has gained ground, investors have seen little reason to exit bets against the yen while the Bank of Japan holds yields near zero.

The yen fell as much as 1% on the day to 125.55 yen per dollar, its lowest level since 2015.

"There's nothing there to frighten people out of dollar/yen positions," said National Australia Bank (OTC:NABZY)'s head of foreign exchange Ray Attrill. "So onwards and upwards for dollar/yen."

Sterling was broadly flat versus the dollar at $1.30380.

The Russian rouble weakened in jittery trade, reversing some of the previous week's gains, after the central bank decided to relax temporary capital control measures.

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GBP/USD remains on the defensive near three-week low, just above mid-1.3000s

The GBP/USD pair remained on the defensive through the early European session and was last seen trading just a few pips above the three-week low, around the 1.3055 region.

The pair witnessed some selling during the first half of the trading on Wednesday and dropped to the lowest level since March 16, though showed resilience below the mid-1.3000s. The US dollar gained traction for the fifth successive day and shot to a nearly two-year peak, which, in turn, exerted some downward pressure on the GBP/USD pair.

The markets seem convinced that the Fed would hike interest rates by 100 bps over the next two meetings to combat stubbornly high inflation. Moreover, Fed Governor Lael Brainard said on Tuesday that the US central bank could start reducing its balance sheet at a rapid pace as soon as the May meeting and provided a goodish lift to the buck.

Expectations for a more aggressive Fed pushed the yield on the 2-year US government bond, which is highly sensitive to rate hike expectations, to its highest level since January 2019. Moreover, the yields on the 5-year and the benchmark 10-year bonds jumped to their highest since December 2018 and April 2019, respectively.

Hence, the market focus will remain glued to the FOMC monetary policy meeting minutes, due for release later during the US session. In the meantime, fading hopes for a diplomatic solution to end the war in Ukraine and concerns about more Western sanctions on Russia over its alleged war crimes should benefit the safe-haven greenback.

The fundamental backdrop seems tilted in favour of bearish traders and supports prospects for a further near-term depreciating move for the GBP/USD pair. With technical indicators still far from being in the oversold zone, spot prices seem vulnerable to sliding back to challenge the YTD low, around the 1.3000 psychological mark.

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 Dollar Edges Lower Ahead of Fed Minutes; Aussie Dollar Soars

The U.S. dollar traded in a tight range Tuesday, while the euro edged lower on talk of additional sanctions on Russia and the Australian dollar received a boost from a hawkish central bank.

At 3:00 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded marginally lower at 98.955, just below the one-week high of 99.083 reached overnight. 

The dollar has been drifting this week so far as investors await the arrival of the minutes from last month’s Federal Reserve policy meeting, due on Wednesday. 

Expectations are building that the central bank will move more aggressively at its meeting in May, especially after a jobs report that showed nonfarm payrolls increasing by 431,000 jobs last month while the unemployment rate fell to a new two-year low of 3.6%.

Ahead of the Fed minutes, Tuesday sees the release of ISM’s non-manufacturing PMI data for March, at 10:00 AM EST (1400 GMT), which is expected to show increased momentum in March, while speeches from Fed policymakers Neel Kashkari, Lael Brainard and John Williams will also be closely studied.

Elsewhere, AUD/USD rose 0.9% to 0.7607, jumping to a nine-month high, after the Reserve Bank of Australia left its benchmark interest rate unchanged at 0.1% at its latest policy setting meeting, but indicated that rate hikes were coming.

Australia’s central bank dropped its pledge to be "patient" on tightening policy in its statement following the decision, a phrase that has featured in every post-meeting release since November 2021, suggesting that it is going to hike sometime soon.

EUR/USD was largely unchanged at 1.0972, hovering above a one-week low, on talk of fresh sanctions on Moscow following alleged atrocities on civilians by Russian forces in the Ukrainian town of Bucha.

German Chancellor Olaf Scholz said that Putin and his supporters would "feel the consequences" of events in Bucha, while Biden's national security advisor, Jake Sullivan, stated that new U.S. sanctions against Moscow would be announced this week.

“It still seems that the EU is some way from weaning itself off Russian oil,” said analysts at ING, in a note. “Presumably, any moves from the EU toward a Russian oil embargo would see crude prices spike higher again and the euro come under pressure.”

USD/JPY fell 0.2% to 122.58, dropping back further from the multi-year high of 125.10 reached in late March after Bank of Japan Governor Haruhiko Kuroda stated that the recent pace of appreciation was "somewhat rapid," and policymakers are watching moves "carefully."

GBP/USD rose 0.1% to 1.3133, USD/CNY was flat at 6.3638, while USD/TRY rose 0.1% to 14.7092 the day after Turkey’s inflation jumped to a fresh 20-year high in March, with consumer prices rising an annual 61.1% through last month.

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GBP/USD eyes break below 1.3100 and towards key support amid buoyant buck

• GBP/USD is trading with a downside bias as the euro underperforms and 21DMA continues to act as a ceiling.
• A break lower to test last week’s 1.3050 lows looks on the cards, with bears also eyeing 1.3000 annual lows.
• Following hawkish Fed commentary over the weekend and ahead of possibly more this week, USD risks are tilted higher.

In a relatively tame start to the week for currency markets, GBP/USD is trading with a downside bias and is currently threatening a downside break of the 1.3100 level. Sterling is likely weighed by underperformance in its cross-English Channel peer the euro, which is underperforming ahead of the resumption of Russo-Ukraine peace talks later in the session and amid further chatter about a possible EU embargo on Russian energy imports. Commentary from BoE policymakers on Monday did not stray into the territory of monetary policy and thus hasn’t impacted cable, which probed last Friday’s lows in the 1.3080s earlier in the session and is eyeing a break lower towards last week’s lows around 1.3050.

“Despite much focus on the heaviest cost of living rise since British records began (1950s), the market still prices the BoE Bank Rate at 2.20% at the December meeting later this year,” noted analysts at ING. “That pricing of the BoE cycle is likely keeping GBP relatively well bid, although we do think the risks are growing of Cable breaking down to the $1.25/28 area over coming months,” they warn. Amid a light UK data schedule this week, the risks posed to GBP from fears of a weakening UK economy likely won’t be the major market focus.

Rather, the outlook for Fed policy is likely to be a much more important topic. Already over the weekend, there has been fresh hawkish commentary. Fed’s John Williams warned that balance sheet reduction could start as soon as May and Fed’s Mary Daly said the case for a 50 bps rate hike in May has grown. Various Fed policymakers will be making public appearances and talking policy throughout the week and the minutes of the Fed’s most recent, hawkish meeting will be published on Wednesday.

Risks seem tilted towards the upside for the US dollar amid the risk of further hawkish Fed vibes. GBP/USD’s 21-Day Moving Average in the 1.3120s, which has been providing solid resistance over the past few weeks, looks likely to continue acting as a ceiling for the time being.

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