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Market Comment – Yen stays on the backfoot despite BoJ rate hike speculation



  • Wage data drives up bets of BoJ rate hike on Tuesday but yen not convinced

  • Weaker yen boosts Nikkei but inflation worries weigh on Wall Street ahead of Fed

  • Dollar steady in calm start to a very busy week but oil unsettled by geopolitics

All eyes on BoJ decision as yen slips

Intensifying speculation about a potential historic rate hike by the Bank of Japan is dominating the start of the week where the Federal Reserve, as well as central banks in the UK, Switzerland and Australia will also be announcing their latest policy decisions. Investors betting that the BoJ will not wait until its April meeting before scrapping its controversial negative interest rate policy got a boost last Friday from preliminary wage data.

Japan’s largest trade union, Rengo, announced that its members had agreed to wage increases averaging 5.28% for 2024, the largest in 33 years. Indications that Japan’s biggest companies are bumping pay at an inflationary pace had already prompted several BoJ board members to hint at a possible liftoff in March rather than April. But their optimism wasn’t backed by Governor Kazuo Ueda, who remained somewhat sceptical in his most recent remarks and did not foresee a policy shift before April.

Traders are also not entirely convinced either and see only a 44% probability of a 10-basis-point hike in March. That leaves the yen exposed to upside risks should the Bank of Japan finally decide to exit negative rates on Tuesday, which have been in place since 2016.

However, the decision itself might provide a temporary lift only for the Japanese currency. Much of the yen’s pullback over the past week is down to growing doubts as to whether the BoJ would tighten policy significantly. If the BoJ does hike rates but signals that it’s a ‘one and done’ move, the yen will struggle to hold onto any immediate gains. There’s also uncertainty about whether or not policymakers will additionally abandon their yield curve control policy.

Inflation jitters hit Wall Street ahead of Fed

For now, though, the weaker yen is good news for domestic stocks, with the Nikkei 225 index rallying 2.7% on Monday. There’s a risk that the BoJ might go further than anticipated in removing stimulus or it flags its intention to do so, and this could spark a sharp correction.

On Wall Street, investors are already on edge about the Federal Reserve potentially pencilling in fewer cuts for 2024 than in the December dot plot when three rate cuts were projected. A string of upbeat economic data not to mention hotter-than-expected CPI prints have spurred a major repricing in Fed rate cut expectations, with markets grudgingly aligning themselves with the FOMC’s outlook on rates.

Revived fears of ‘higher for longer’ are weighing on tech stocks ahead of the Fed’s decision on Wednesday, with the Nasdaq 100 ending last week with losses of more than 1%. However, as the Magnificent 7 come under scrutiny about their lofty valuations, Nvidia might yet manage to inject some fresh excitement this week as the company holds its annual conference on Artificial Intelligence (AI) where it’s expected to unveil some new chip products and enterprise solutions.

Aussie and euro edge up as dollar flat

In FX markets, the Australian dollar is slightly firmer on Monday, boosted by better-than-expected Chinese data. Industrial output and fixed-asset investment rose more than forecast in the January-February period. Retail sales also beat expectations but moderated year-on-year compared to December. Optimism about China’s growth prospects could offer some support to the aussie should the Reserve Bank of Australia drop its tightening bias when it meets on Tuesday. Whilst the RBA is unlikely to shift the discussion to cutting rates just yet, it may signal that rates have peaked.

The central bank bonanza will continue on Thursday with the SNB and Bank of England. But it is the euro that’s grabbing some headlines today amid more rate cut talk from ECB officials. The ECB looks poised to begin lowering borrowing costs in June, with the dovish Governing Council members pushing for an even earlier cut. Nevertheless, the euro is crawling its way up towards the $1.09 level amid a lacklustre US dollar.

The greenback has had a steady start to this crucial week where both the BoJ and Fed could either deliver a hawkish surprise or disappoint. So it remains to be seen where it will end the week.

Oil hits four-month high

But if oil prices are anything to go by, a hawkish surprise is more likely as WTI and Brent crude futures are headed towards early November levels, in a setback for energy costs.

Attacks by Ukrainian drones on Russian refinery facilities in recent days, including on Sunday when Russian voters cast their ballots in presidential elections, have raised supply concerns. Meanwhile, the dwindling prospect of a truce in Gaza and signs that Israel will soon broaden its assault to the Rafah region are also pushing up oil prices.


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