Asia FX Talk - All Eyes on Bank of Japan

Ahead Today

G3: Bank of Japan policy, Eurozone CPI, US Housing Starts

Asia: Malaysia Trade, BOK Minutes

Market Highlights

Fed officials continued to push back against the magnitude of interest rate cuts expected by markets. Chicago Fed President Goolsbee said he was surprised by the outsized market reaction to the Fed’s updated economic projections, while Cleveland Fed and San Francisco Fed presidents said expectations for rate cuts early next year were premature. Meanwhile, expectations of a rebound in Europe’s largest economy early next year were dampened as the German IFO business expectations index declined for the first time since August, falling to 84.3 for the month of December.

Overall, with the soft European numbers and pushback from Fed officials, the Dollar was up marginally, US 10-year yields rose to 3.93%, and the S&P500 rose by 0.4%.

Looking ahead, all eyes will be on Bank of Japan’s policy update later today. While markets expect no change in policy this meeting, the focus will also be on the updated statement and Governor Ueda’s remarks in his press conference if they open a pathway to a rate hike. Key things to watch for include a possible alteration to the final sentence of the policy statement, as such removing the bias to ease. Governor Ueda’s press conference could also contain hints about BOJ’s assessment on price stability and wage growth, leaving open the possibility of a change in policy in January while also giving the BOJ flexibility.

Regional FX

Asian FX were mixed against the Dollar on the back of higher US yields. USDCNH rose to 7.14, while MYR and KRW weakened by 0.4%. China’s economic planning agency NDRC plans to adopt various policies next year to consolidate the nation’s recovery. It plans to boost industrialization, urbanization, and the digital sector next year, while also making good use of proceeds of sovereign and local government bonds to support key technology and infrastructure development. Meanwhile, a Chinese developer partially owned by Shenzhen - China South City Holdings – warned it can’t pay interest due Wednesday, as it races to win support from creditors to extend dollar bond deadlines.