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US CPI Meets Expectations, Yen Rises, Eyes on BOJ Decision

US CPI Data Aligns with Expectations, Yen Rallies 1%, Easing FX Intervention Fears and Shifting Focus to BOJ

By Athena Xu

5/15, 16:50 EDT

Key Takeaway

  • US CPI data aligned with expectations, boosting the yen's value and reducing fears of FX intervention, spotlighting BOJ's potential rate decisions.
  • A softer inflation report impacts monetary strategies in Japan and China, with a stronger dollar raising intervention chances by Japanese authorities.
  • Market dynamics pre-CPI showed dollar strength and anticipation, affecting Chinese equities and G-10 currencies, with post-data focus on BOJ actions.

US CPI Data and Yen Performance

The release of the US Consumer Price Index (CPI) data on Wednesday, which aligned with market expectations, has notably influenced the Japanese yen, propelling it to its most significant rally in two weeks. This development has momentarily eased fears of foreign exchange (FX) intervention and shifted focus towards the Bank of Japan's (BOJ) next moves. For the yen to sustain its momentum, it is imperative for the BOJ to align with market anticipations and implement another rate hike. The yen's 1% ascent marks its most substantial gain since May 1, a period during which Japanese authorities are believed to have sold $23 billion to support the currency. This recent rally, coupled with Treasury Secretary Janet Yellen's remarks on the rarity and consultative nature of interventions, suggests a higher threshold for further dollar-selling actions from Tokyo.

Central Bank Responses to CPI

The US CPI data's implications extend beyond immediate market reactions, influencing the monetary policy strategies of Japan and China. A softer inflation report could have prompted swift actions from both the BOJ and the People's Bank of China (PBOC) to adjust their currencies against the dollar. Conversely, a higher CPI figure, indicating a stronger dollar, might necessitate intervention by Japanese authorities, especially if USD/JPY approaches the 160 mark. This scenario poses a challenge for the PBOC as well, as a stronger USD/CNH complicates policy easing efforts without impacting the yuan negatively, amidst pressures from capital outflows.

Market Dynamics Pre and Post CPI Release

Prior to the CPI announcement, market dynamics were characterized by the dollar's strength, influenced by weak economic indicators from China. Chinese equities, particularly the ChiNext index, faced declines following disappointing credit and inflation data, contributing to a slight depreciation of the yuan against the dollar. The Bloomberg Dollar Spot Index's stability, alongside the underperformance of the Australian and New Zealand dollars among G-10 currencies, underscored the market's anticipation of the CPI data. Although the risk of yen intervention was deemed remote by analysts, the CPI outcome had the potential to shift this perspective significantly.