Cautious BoJ & Middle East disruption trigger setback for yen

JPY: BoJ’s still cautious policy stance triggers correction lower for yen

The yen has weakened during the Asian trading session following today’s decision from the BoJ to leave their policy stance unchanged. It has resulted in USD/JPY rising up to an intra-day high of 144.07 after trading closer to 142.60 prior to today’s policy announcement. While it was widely expected that the BoJ would leave their policy unchanged today, there still appears to be some initial disappointment amongst market participants that the BoJ did not provide a stronger signal that they are considering an imminent exit from negative rate policy at the start of next year. In the accompanying policy statement, the BoJ maintained their dovish guidance that it would take “additional easing steps if necessary”. In light of “extremely high uncertainties” surrounding economies and financial markets at home and abroad, the BoJ will “patiently continue with monetary easing while nimbly responding to developments in economic activity and prices as well as financial conditions”. Furthermore, the description of the economy and inflation was similar to the last policy meeting in October. The BoJ believes that underlying CPI inflation is likely to increase gradually toward achieving the price stability target, as the output gap turns positive and as medium-to-long term inflation expectations and wage growth rise.     

In the following press conference, Governor Ueda did note that he is seeing positive comments on wages next year and that the chances for hitting their 2.0% inflation target are rising. He wants to see the inflationary impact from wage gains spreading to prices in particular services prices. When examining whether the positive cycle of wages and prices is working, he clarified that the BoJ will pay attention not just to data but hearings too when setting monetary policy. He was reluctant though to provide clear guidance to indicate when they will likely have seen enough data to give them more confidence that they can begin to tighten policy. As a result, he stated that it was hard to show exit plans with certainty now. The BoJ still needs to mull the impact of a rate hike comprehensively.

Overall, the comments from Governor Ueda today and the largely unchanged policy statement have provided a dovish signal that the BoJ is not yet ready to commit to a time line for raising rates, and wants to maintain policy flexibility. The cautious approach casts doubt on our forecast for an exit from negative rates in January although does not completely rule out an imminent policy shift to tighter policy at the start of next year if upcoming data and hearings given them more confidence in the inflation outlook. However, the chance of flagging a rate hike in January was described “low” by Governor Ueda with little new data expected by then. It provides a short-term setback for the yen but with policy divergence between the BoJ and other major central banks set to narrow next year, we still expect the yen to strengthen further in 2024.              

One additional downside risk to our outlook for yen strength that we continue to monitor closely are developments in the Middle East. The price of oil jumped yesterday back up towards USD80/barrel for Brent in response to widening disruption to shipping through the Red Sea. According to Bloomberg, fifty-six merchant ships entered or left the Red Sea on Saturday and Sunday which was down by 35% from the start of the month. BP announced yesterday that it would “keep this precautionary pause under ongoing review” after stopping ships from sailing through the Red Sea in response to the threat posed by recent attacks carried out by Iran-backed Houthis. Three of the largest container-liner operators, MSC, Maersk and CMA CGM have all said as well that they will avoid Bab-el-Maneb which is a chokepoint of the Red Sea from the Gulf of Aden. The developments require close monitoring and could challenge the outlook for slowing inflation and expectations for earlier and deeper  rate cuts from major central banks next year if the situation escalated significantly.      

APPETITE TO ADD TO ELEVATED SHORT JPY POSITIONS SHOULD BE LIMITED

Source: Bloomberg, Macrobond & MUFG GMR

EM FX: Fed opens door to rate cuts providing relief for EM currencies

Emerging market currencies have rebounded over the past week driven by heightened speculation over earlier and deeper Fed rate cuts next year. The best performing currencies in to the week to Monday were the ZAR (+3.4% vs. USD), PLN (+1.5%), RON (+1.5%), KRW (+1.5%), COP (+1.2%) and HUF (+1.1%). In contrast, the PHP (-0.4%), TRY (-0.3%), TRY (-0.3%) and MYR (-0.2%) still weakened against the USD. The biggest mover of last week though was the ARS which has lost just over 50% of its value after the new Milei administration announced as sharp devaluation as part of 10 comprehensive measures to overhaul the economy.      

The main trigger for the emerging market currency rebound was the surprisingly dovish policy pivot from the Fed. Chair Powell has clearly signalled that the Fed’s next policy move is now more likely to be a rate cut rather than a hike which could even be delivered as soon as in Q1 of next year in response to slowing US inflation. However, there has since been pushback from New York Fed President Williams against expectations for a rate cut as soon as at the March FOMC meeting which he described as “premature”. The ongoing dovish repricing of outlook for Fed policy leaves the USD vulnerable to further weakness heading into early next year, although current US rate market pricing sets a higher hurdle now for further dovish policy surprises. The release of the latest PCE deflator report for November on Friday is expected reveal further evidence of slowing underlying US inflation pressures and is not expected to challenge the US dollar’s recent sell-off.          

In the week ahead, it will be the turn of the NBH (today), CNB (Thurs), and CBRT (Thurs) to hold their last policy meetings of 2023. The NBH is expected to lower their policy rate by 75bps for the third consecutive meeting to 10.75%. It will further undermine the HUF’s carry appeal at the margin. Ahead of the meeting, EUR/HUF has again attempted and failed to break below support from the 200-day moving average at the 380.00-level providing a bearish technical signal for HUF. The CNB’s upcoming policy decision is viewed as a closer call. We expect the CNB to begin their rate cutting cycle by gradually lowering their policy rate by 25bps to 6.75%, but there is a notable risk that it could hold off until early next year. A rate cut would be more conducive for EUR/CZK moving back towards year to date highs from October at 24.747. Finally, the CBRT has signalled clearly that they plan to slow the pace of rate hikes this week after delivering three consecutive 500bps hikes. The forward rate market has recently been scaling back expectations over the scale of TRY depreciation in the year ahead. Please see our latest EM EMEA Weekly for more details (click here).  

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	10:00	CPI (YoY)	Nov	2.4%	2.9%	!!!
UK	13:00	BoE Breeden Speaks	--	--	--	!
US	13:30	Housing Starts	Nov	1.360M	1.372M	!!
CA	13:30	CPI (YoY)	Nov	2.9%	3.1%	!

Source: Bloomberg