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A more bearish backdrop for the yen might unfold if the Bank of Japan holds firm, ignoring elevated inflation and indications that price growth could persist. In this scenario, wide interest rate differentials should continue to depress the yen: especially if risk sentiment remains buoyant, inflation cools, and global growth slows whilst avoiding more sinister outcomes. USDJPY and Japan Trade-Weighted Index
While yield spreads in absolute terms look set to remain skewed against the yen for some time, we believe the bulk of the adjustment has played out. The balance of probabilities is tilted toward differentials narrowing and the yen recovering further. As other central banks, such as the Federal Reserve, European Central Bank, and Bank of England, contemplate a policy easing cycle, the Bank of Japan appears set to embark on a normalisation path. Modest tweaks, such as the formal ending of yield curve control, may well see markets discount larger steps further out. We are projecting the yen to...
• Central banks. ECB & BoE kept rates steady but tried to push back on policy easing expectations. This helped EUR & GBP with the USD still under pressure.• Fed impacts. The US Fed’s dovish turn has continued to reverberate across markets. Bond yields fell again & risk sentiment remains positive.• AU jobs. Employment exceeded forecasts & while unemployment ticked up it remains low. China data batch due today. This can impact the AUD. Following yesterdays ‘dovish’ pivot by the US Fed and signals that rate cuts will probably be the next step, central banks remained in focus overnight. As...
• US Fed. A ‘dovish’ pivot by the Fed. Comments & updated forecasts point to the next step being policy easing, with several cuts projected in 2024.• Market repricing. US bond yields tumbled as markets adjusted their thinking. This weighed on the USD & propelled the AUD & risk markets higher.• AU jobs. After a strong Oct., there are risks to the Nov. data. This may exert short-term pressure on the AUD, but it shouldn’t change the bigger USD driven trend. All eyes were on the US Fed meeting and press conference this morning and the ‘dovish’ tilt we were...
• Market swings. Some intra-session vol. around the US CPI. But net market moves have been modest. USD softer, though lower oil prices held down the AUD.• US inflation. Data matched predictions. Headline inflation slowed to 3.1%pa, while core steady at 4%pa. Firmer services shows the last leg could be difficult.• US Fed. No policy change expected. While the Fed should reiterate it may do more if needed, we think the forecasts should show that the next move will be a rate cut. There has been a bit of market volatility overnight around the release of the latest US CPI...