Forex: Cross asset volatility is ebbing

Cross-asset volatility is diminishing in tandem with the decrease in US yields, spurred by Friday's downside miss on the US jobs report and a dearth of significant US economic data releases this week. Nevertheless, there have been notable movements, especially in USD/JPY, which continues its post-intervention rebound.

The continuation of this uptrend follows remarks from Japan's top currency official, Masato Kanda, suggesting that intervention may not be required if markets remain stable. However, such statements likely prompted speculative activity during the “grey zone” a period of low liquidity, testing the authorities' resolve and potentially unsettling the JPY in a less orderly fashion. The pertinent question is whether we are witnessing a revival of the cat-and-mouse dynamic between CTAs and the Ministry of Finance. If so, 155 in USD/JPY could hold significant intrigue.

Traders continue to view the Japanese yen as a primary funding currency, as evidenced by ongoing price action that reinforces its established status. Additionally, US Treasury Secretary Janet Yellen's recent remarks, advocating for FX intervention to be 'rare and in consultation,' have not assisted Tokyo's efforts to stabilize the yen. However, despite Yellen's comments, both Tokyo and dollar bears are likely to overlook them, as a weaker USDJPY is beneficial for attracting Japanese bond buyers—a development that the Treasury should welcome.

Bond yields on both sides of the pond kicked off the week lower driven by the prevailing dovish sentiment stemming from the lower-than-expected US nonfarm payroll figures released on Friday. Coupled with the ISM manufacturing and services indices dipping below 50 last week, the market increasingly interprets these as signs of a slowdown in the US economy.

Conversely, Monday morning's eurozone PMIs indicated a sustained recovery, with the final composite PMI for April reaching 51.7. Normally, this would imply a potential upward movement for EURUSD. However, despite most eurozone PMI numbers surpassing expectations, the market showed little reaction, with euro rates trading lower for the day.

Instead, investor focus seemed to center more on comments from European Central Bank speakers, particularly Chief Economist Lane, who expressed confidence in the prospect of a rate cut in June. Although some of the more dovish ECB Governing Council members hinted at the possibility of four cuts in 2024, the improving growth indicators suggest that such an aggressive path of cuts may not be warranted.

Ahead of the RBA meeting, traders adjusted their expectations, removing the possibility of rate cuts for the remainder of the year, which propelled the AUDUSD to above 0.6640. However, Governor Bullock's affirmation of policy confidence, emphasizing that current rates are sufficient to steer inflation toward the target, served as a rebuttal to those anticipating premature rate hikes and the AUDUSD slipped back below .6600

The absence of US tier-one economic data suggests that FX markets might maintain a range-bound pattern in the near term. However, we anticipate a negative shift in momentum for the US dollar, expecting economic data from the United States to weaken.