JPY outperforms as BoJ continues to deliver hawkish policy signal
USD/JPY: Fed to take time before cutting rates while BoJ talks up further hikes
The US dollar is little changed since yesterday’s FOMC meeting with the dollar index continuing to trade just below the 108.00-level. It is a similar story in the US Treasury market. The 2-year US Treasury yield initially climbed to a high of 4.26% but has since fallen back to where it was trading just before yesterday’s FOMC meeting at 4.21%. Market participants are still expecting the Fed to meet their updated plans from December by delivering a further 50bps of rate cuts by the end of this year with the next rate cut not expected until the May (-13bps) or June (-25bps) FOMC meetings. The US dollar and US yields initially moved higher in response to hawkish updates in the FOMC statement but quickly gave back those gains after Fed Chair Powell struck a more dovish tone in the press conference. At last night’s FOMC meeting the Fed decided to leave rates on hold for the first time during the current easing cycle. The updated statement removed the previous description that labour market conditions had “generally eased” and that inflation had “made progress towards the Committee’s 2 percentage objective”. They were replaced by the updated descriptions that labour market conditions are “solid” and inflation is still “somewhat elevated”.
However, in the accompanying press conference, Fed Chair Powell played down the significance of the changes to the FOMC statement which was described as a “cleaning up exercise”. The main policy message was that he emphasized that the Fed is not in a hurry to make any adjustments to policy signalling that another rate cut as soon as the next meeting in March is unlikely. He added that the Fed would need to see further progress on inflation or weakening in the labour market to consider another rate cut. Perhaps a signal that the Fed may still cut rates if inflation continues to slow even if the labour market does not weaken. He also stated that he still judges that the Fed’s current policy stance is “meaningfully” restrictive which is consistent with the Fed’s plans to deliver further rates cuts this year if the US economy evolves in line with their outlook. By taking more time to weigh up when to cut rates further, the Fed will also be able to better assess the potential impact of President Trump’s policy plans on the US economic outlook. Overall, the updated policy message from the Fed favours rates being on hold for longer during the 1H of this year although an earlier cut in March can’t be completely ruled out yet. With other G10 central banks still cutting rates further at the start of this year, the widening policy divergence contributes to a stronger US dollar alongside the looming risk of US tariffs hikes at the start of Trump’s second term.
The biggest mover overnight amongst G10 currencies has been the yen. It has resulted in USD/JPY falling back closer to the 154.00-level. The main trigger for yen outperformance has been a hawkish speech from BoJ Deputy Governor Himino. He stated that the policy rate will need to rise further if the BoJ’s economic outlook is realized. He emphasized that real rates in Japan remain significantly negative even after last week’s rate hike. More specifically he opined that “I don’t think it’s normal for real interest rates to remain clearly negative if shocks and deflationary factors are resolved”. The comments will reinforce building expectations that the BoJ could deliver two further rate hikes this year lifting the policy rate up to 1.00%.
LEVERAGED FUNDS MORE RELUCTANT TO REBUILD JPY SHORTS
Source: Bloomberg, Macrobond & MUFG GMR
EUR/CAD: ECB to follow BoC by delivering another cut amidst tariff risks
The widening policy divergence should be on show later today when the ECB is expected to deliver another 25bps rate cut lowering their policy rate to 2.75%, and leaving the door open to another rate cut as soon as at the next policy meeting in March. The euro-zone rate market is already almost fully priced for the ECB to deliver 25bps rate cuts at both today’s and March’s policy meetings, and for the policy rate to move closer to 2.00% by the autumn. With growth still weak in the euro-zone and risks titled to the downside, and inflation closer to the ECB’s target, officials have indicated that they support moving rates closer to neutral territory. We expect the policy rate to bottom at 2.00% this year but can’t rule out more stimulative levels if downside risks to growth materialize such as Trump putting tariffs on imports from the EU. An outcome that could be required for a more sustained break back below parity for EUR/USD.
However, the EU does not appear to be a one of Trump’s initial targets for tariff hikes at the start of his second term. Trump has threatened to hike tariffs on Canada, China and Mexico from 1st February. The imminent risk of tariff hikes was clearly weighing more heavily on the BoC’s minds when making yesterday’s policy decision. BoC Governor Macklem stated that it was an important factor in their decision to deliver another 25bps rate cut yesterday despite evidence that past rate cuts have started to boost the economy with the recent strengthening of consumption and housing activity expected to continue in the absence of new tariffs. The BoC does though expect GDP and potential growth to be more moderate than expected in October due to the government’s reduced immigration targets.
The BoC did emphasize that the baseline economic outlook was subject to more-than-usual uncertainty particularly because of the threat of trade tariffs from the US. In the Monetary Policy Report, the BoC revealed that they expect a long-lasting and brad-based trade conflict would badly hurt economic activity in Canada. At the same time, the higher cost of imported goods will put direct upward pressure on inflation. Governor Macklem stated that when considering their potential monetary policy response to a tariff shock, the BoC would need to carefully assess the downward pressure on inflation from weakness in the economy, and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions. We would expect the tariffs to tip the balance more in favour of the BoC cutting rates further to support growth. The BoC also expects the Canadian dollar to weaken in response to the deterioration in Canada’ trade balance and likely hit to Canada’s terms of trade. As we have highlighted before (click here), we expect the Canadian dollar to weaker by a further 5-10% if the Trump goes ahead and puts in place 25% tariff hikes on imports from Canada. Some of the initial negative impact on the Canadian dollar would be dampened if as seems likely Canada puts in place retaliatory tariffs against the US.
KEY RELEASES AND EVENTS
|
Country |
GMT |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
IT |
09:00 |
Italian GDP (QoQ) |
Q4 |
0.1% |
0.0% |
! |
|
GE |
09:00 |
German GDP (QoQ) |
Q4 |
-0.1% |
0.1% |
!!! |
|
UK |
09:30 |
BoE Consumer Credit |
Dec |
0.950B |
0.878B |
! |
|
EC |
10:00 |
Business Climate |
Jan |
-- |
-0.91 |
! |
|
EC |
10:00 |
GDP (QoQ) |
Q4 |
0.1% |
0.4% |
!! |
|
EC |
10:00 |
Unemployment Rate |
Dec |
6.3% |
6.3% |
!! |
|
GE |
11:30 |
German Buba President Nagel Speaks |
-- |
-- |
-- |
!! |
|
EC |
13:15 |
Deposit Facility Rate |
Jan |
2.75% |
3.00% |
!!! |
|
US |
13:30 |
GDP (QoQ) |
Q4 |
2.7% |
3.1% |
!!! |
|
US |
13:30 |
Initial Jobless Claims |
-- |
224K |
223K |
!!! |
|
EC |
13:45 |
ECB Press Conference |
-- |
-- |
-- |
!!! |
|
JP |
23:30 |
CPI (YoY) |
Jan |
-- |
1.1% |
! |
Source: Bloomberg
