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Talking Points:

• Japanese Yen soars vs. major currencies financing costs jump again

• US Dollar back on the defensive after March FOMC meeting minutes

• Fed may be setting the stage for June hike despite market skepticism

The Japanese Yen outperformed in overnight trade, rising to the highest level since August 2013 against its major counterparts. The move played out against the backdrop of another sharp jump in forward rates. Furthermore, the currency’s gains were mirrored in a drop in benchmark Japanese government bond futures, implying an increase in the cost of JPY-denominated financing. In fact, the implied carry return on ownership of most major currencies funded in terms of the Japanese unit has steeply declined.

Meanwhile, the US Dollar declined against all of its top counterparts. The move seems to follow from traders’ interpretation of minutes from the March FOMC meeting. The greenback initially rallied as policymakers signaled that several participants favored tightening last month, the move fizzled into the end of the North American session and appears to be gathering steam in the opposite direction in Asian trade. This may reflect the re-establishment of anti-USD bets unwound ahead of the announcement after a clear-cut hawkish surprise did not emerge.

Looking beyond near-term volatility however, the Minutes document may ultimately prove to set the stage for a June rate hike, and ultimately a stronger Dollar. As we suspected, the Fed used the release to signal that external headwinds – while worrisome – remain a possible rather than realized threat to the policy outlook. Officials agreed that the US has been resilient amid global instability and expected the economy to continue to expand despite the presence of cross-border risks.

This seems crucial to re-establishing the causal link between US economic news-flow and the priced-in policy outlook. Inasmuch as data outcomes have increasingly firmed relative to consensus forecasts over the past two months, that has scope to realign official and market-based rate hike bets by the next “big-splash” FOMC meeting in June. This would allow the central bank to hike with relative impunity, without worrying about triggering another round of counter-productive risk aversion akin to the aftermath of December’s rate increase.

Where will the markets go in the second quarter? See our forecast here!

Asia Session

European Session