[Original Author, by Nigel Ng]
USDJPY soared on a dovish Bank of Japan, as people unwound their bets on YCC removal. This seemed to me as a positioning event which I expect to get faded on the correct developments. Lots of data and events this upcoming week, but the most important thing to take note of is whether the Fed will entertain cuts, or a June hike. Market is now pricing a small chance of a 200bp cut (the recession trade), and banking fears are now spreading like wildfire in regional banks. This makes it more so unlikely that the Fed will be hawkish, but that scenario cannot be ruled out either.
The scenario analysis for the Fed is simple. Most likey this will be the final hike, and it could be bearish if they don’t. The market will interpret that as the Fed knowing more about the cracks in the banking system than the market, forcing them to hike. This is especially so as Powell has explicitly said before that he does not like surprising the market (tends to follow market expectations). The playbook here is to sell rallies on no hike today.
The language/guidance on cuts and hikes would be the next most important factor. Simply, mentioning cuts at all would be bullish. This could come in the form of “Given the stress in the banking sector, the Federal Reserve leaves open the possibility of interest rate cuts to…”. On the other side of the coin, explicitly ruling out cuts would be bearish, due to the probabilistic pricing of cuts in the market.