Yen rallies after BoJ policy tweak – Daily Market Brief, December 20, 2022

The BoJ announced an adjustment to its yield curve control program, hinting towards a less dovish stance. The move boosted the yen and hit risk sentiment pulling stocks lower.

·         USD/JPY drops to a 4-month low below 133.00

·         EUR/USD falls as German PPI cools by more than expected in November to 28.5%

·         Eurozone consumer confidence is expected to improve again in December

While European stocks closed higher yesterday, U.S. stocks fell sharply lower as rising bond yields hurt demand for the tech sector. The Nasdaq led the charge lower, closing down 1.5% as investors continued to fret over the Federal Reserve’s path for interest rates next year.

Asian markets plunged overnight after a surprise move from the BoJ. While the central bank left its interest rate on hold at -0.1%, it tweaked its monetary policy by widening the band within which the government benchmark bond yield is allowed to fluctuate by 25 basis points to 50 basis points either side of 0%. The move comes as inflation in Japan sits at a four-decade high and is almost double the target 2% rate.

There has been growing speculation in recent weeks that the BoJ could move towards a less dovish monetary policy stance, and this move is fuelling expectations of an eventual pivot and comes after reports over the weekend that the Japanese government was looking at tweaking the central bank’s mandate, possibly when BoJ Governor Kuroda steps down in April.

In short, the meeting was far more hawkish than the markets were expecting, helping to boost the yen as its recovery continues from a 3-decade low reached in October. The timing of the tweak has also been interesting given that a move towards a more hawkish stance was expected, but in the coming year, which suggests that there could be a level of concern at the BoJ that inflation is in danger of becoming more entrenched.

USD/JPY trades -3% at 132.75 at the time of writing, the lowest level in 4 months.

Santa rally hopes fade

The prospect of a Santa rally is looking highly questionable even before this latest move. The BoJ’s tweak comes after both the Federal Reserve and the ECB were more hawkish than expected last week and has hit risk appetite sending stocks lower.

Following weakness on Wall Street and in Asia overnight European markets are also looking at a sharp drop on the open.

The DAX is pointing to a -0.85% fall on the open, the CAC is set to fall -0.75% and the FTSE is set to decline -0.55%.

German PPI

Further signs of cooling German inflation are failing to help the DAX. German PPI fell by more than expected to 28.2% YoY in November, down from 34.5% in October and below forecasts of 30%. Energy prices were down almost 10% compared to the previous month as natural gas and electricity costs fell. PPI is often considered a lead indicator for CPI and therefore suggests that consumer prices could also continue to fall.

EUR/USD trades 0.05% lower at 1.06 after the data.

Attention will now turn to eurozone consumer confidence which is also expected to improve slightly in December to -22.5, up from -23.9 in November, a five-month high.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

Sources: Bloomberg, CNBC, Reuters 

Original article provided by Trading Writers

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