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Market Comment – Yen flies as BoJ’s Ueda talks ultra-loose policy exit

  • BoJ Governor Ueda discusses options after ending negative rates

  • Yen rallies as speculation for BoJ pivot intensifies

  • Dollar defies weak labor market data again

  • Wall Street slips, oil falls 4% on gasoline stock build

BoJ’s Ueda adds fuel to yen’s tanks

The US dollar continued gaining ground against most of its major peers yesterday, but today the protagonist was the yen, which rallied following remarks by BoJ Governor Ueda on exiting negative interest rates.

The BoJ chief said that they have several options on which interest rate to target once they end negative interest rate policy, including raising the rate applied to financial institutions’ reserves or going back to targeting the overnight call rate. He also added that the speed at which interest rates will rise after exiting negative territory would depend on economic and financial conditions at the time.

Ueda did not offer any clues regarding the timing of a potential exit, repeating that for now they will patiently continue monetary policy easing until the price objective is achieved sustainably and stably and with sufficient certainty. However, only the fact that he talked about exiting negative rates was enough to fuel the yen’s tanks, especially amid rising expectations that other central banks will cut rates sooner than previously thought. Such diverging expectations could continue working in favor of the yen.

Dollar extends recovery despite ADP miss

The dollar continued to recover, ignoring another piece of data pointing to further softness in the US labor market. Yesterday, the ADP report revealed that the private sector gained fewer jobs than expected in November, just a day after the JOLTs job openings for October tumbled to their lowest in more than 2-1/2 years.

Although the ADP is far from a reliable predictor of the NFP number, the fact that both the ISM manufacturing and non-manufacturing surveys revealed weakening employment conditions during the month of November likely adds downside risks to Friday’s report. With investors still seeing a decent 65% chance for the Fed to deliver its first 25bps cut in March, and anticipating around 125bps worth of reductions by December 2024, a jobs report on Friday corroborating that view could bring the dollar’s recovery to a halt.

Perhaps the dollar is performing well lately despite the weakness in the data because investors are now ramping up their rate cut bets regarding other major central banks as well, or perhaps because they are skeptical about the greenback resuming its prevailing downtrend ahead of Friday’s data and next week’s FOMC decision.

Nasdaq leads slide on Wall Street, oil tumble accelerates

Wall Street closed Wednesday in the red, with the rate-sensitive Nasdaq losing the most, even though the 10-year Treasury yield continued to fall. Perhaps some investors are done cheering the prospect of lower borrowing costs in the US and may have started to wonder whether the global economy is headed for a hard landing next year. With that in mind, the stock market’s reaction to Friday’s employment report could clear somewhat the fog on how investors are interpreting the economic landscape.

In the energy sphere, oil prices tumbled another 4% yesterday, hitting their lowest since June after the Energy Information Administration (EIA) reported that US gasoline stocks rose by 5.4mn barrels last week, well exceeding the 1mn-barrel forecast. Although crude oil inventories fell by more than expected, they failed to put a floor to the slide as US crude production is still close to record highs. Yes, the OPEC+ group agreed on more output cuts last week, but this was on a voluntary basis, leaving investors wondering whether all members will abide by their new quotas.

The oil tumble may have been the reason why the Canadian dollar traded lower even as the BoC maintained its tightening bias at yesterday’s decision. The Bank kept interest rates untouched at 5.0%, but reiterated its readiness to raise the policy rate further if needed as policymakers remain concerned about risks to the inflation outlook.

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