Threat is the only way to stop Yen bleeding

The Bank of Japan’s (BoJ) decided to hike the interest rates for the first time after 17 years but the yen has been weakening since then, on fear that this would be a ‘one and done’ cut. As a result, not only that the yen bulls are nowhere to be found but some traders revised their USDJPY forecasts to 155 for the next 3 months, to 150 for the next 6 months and 145 for the next 12 months post the BoJ meeting. Last week’s BoJ meeting and the market reaction to the meeting was a complete disappointment for the yen bulls who thought that the long yen would be the trade of the year. Finally, authorities had to step in this Monday and warn against speculative moves. The yen is stronger this morning, the Nikkei is down by nearly 1%. The FX warnings could limit the seller’s appetite, but will unlikely bring the yen bulls back.  

Up, up and away

The Federal Reserve (Fed) policymakers didn’t sound much concerned about the latest blip in inflation at their last week meeting. The latter sent the US 2-year yield lower, and the dollar weakened in the immediate aftermath of the meeting, but the dollar index rebounded to close the week at the highest levels since February as the strong US economic data brought the Fed doves to doubt the Fed’s ability to cut the rates as soon as in June.

This week, the US will reveal its latest GDP update for the Q4 and the US economy is expected to have grown more than 3% in the final quarter of last year. That’s down from near 5% growth the quarter before, but the number is well above average growth for an economy which is preparing to see its monetary policy loosen.

The US equity markets remain on a euphoric mode on the back of soft Fed and robust data. The S&P500 had a slow session on Friday, but the index had its best week of the year – and it hasn’t been a bad year so far! The index is up by 12% since the year started and nearly 30% since last October – on track for its biggest-ever advance since 1970 ahead of a likely policy easing cycle according to Bloomberg. You bet it is, look at the Fed’s balance sheet, worth more than $7.5 trillion as of today.

And the stats are in favour of a further rise for the S&P500. Over the past 12 rate-cut cycles, the S&P500 climbed 15% on average – again according to Bloomberg. The positive trend is also true for sovereign and corporate bonds. Two major themes emerge into Q2: rate cuts and the AI adoption – both are favourable for stock valuations.

In Europe, the stocks had a record-breaking week, as well. Despite mounting headaches regarding the European luxury stocks and European Central Bank (ECB) Chief Lagarde’s warning that they can’t commit to more rate cuts beyond a June cut – which now sounds like an evidence – the Stoxx 600 advanced and closed the week above 500. In Switzerland, the SNB cut rates in a surprise move. The franc weakened and the SMI also extended gains last week. In contrast to the American and the European stocks, the Swiss equities are well below their post-pandemic peak. But given that around 90% of the SMI revenues are made abroad, a softer franc should clearly help the Swiss stocks healing from an extended period of strong franc. As per franc, there is room for depreciation. The dollar-franc tests the 0.90 psychological resistance to the upside. This is also the major 38.2% Fibonacci retracement on 2022 to end of  2023 drop. The pair will step into a medium term bullish consolidation zone above this level, but the franc’s weakness will be limited by the dovish outlook of its major peers. Against the euro, the parity is the most plausible target but again, franc depreciation will likely be slow and gradual.

This week, some Eurozone countries will reveal their latest inflation figures this week, but the aggregate number is not due before next Wednesday. The EURUSD has been having a rough time despite a more dovish Fed decision and a more hawkish ECB vibes. But I still think that the dollar’s strength will be limited by the dovish Fed talk and that the EURUSD will see support near 1.08 and rebound.

On the corporate calendar, Reddit and Galderma were the biggest IPOs of last week. Both went relatively well as conditions were ideal for a first day. And this week, Trump’s Truth Social will become a publicly traded company by as early as this week according to the latest news. The shareholders of DWAC approved the merger last week. TMGT – Trump Media and Technology Group – will replace DWAC. Note that DWAC has been subject speculation and high volatility since Trump is back on the political scene. Those who like risk and speculation will be well served.