The yen sways as the Bank of Japan challenges the market, and stocks rejoice in falling inflation

  • Interest rate expectations fell after inflation slowed in the US
  • Asian stocks hit a 7-month high
  • Japanese Treasury yields shatter the Bank of Japan’s ceiling as bets grow on a policy shift

SINGAPORE/TOKYO (Reuters) – Asian stocks rose on Friday as investors rejoiced at slowing U.S. inflation, while the yen hit a seven-month high and Japanese bond yields broke above the central bank’s target as markets defied Tokyo’s commitment to a downturn. Monetary policy.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) It rose 0.8%, hitting a new seven-month high and heading for a third straight week of gains.

Japanese Nikkei index (.N225) The yen fell 1.3% and the yen, which climbed 2.7% against the dollar overnight, continued to climb, rising about 0.2% more to 128.65 per dollar. It has risen 6% in just over three weeks since the Bank of Japan surprised markets by widening the range around its 10-year yield target.

A press report suggesting more flexibility is possible has doubled the stakes on the upcoming shift away from an ultra-easy policy that seeks to stabilize yields near zero.

The yield on the 10-year Japanese government bond breached its new ceiling of 0.5% on Friday morning to trade at 0.54%. The Bank of Japan had to announce two separate rounds of emergency purchases worth about 1.8 trillion yen ($13.9 billion) combined.

“The market expects at the next meeting that they will increase the 10-year range again,” said Naka Matsuzawa, chief macro strategist for Japan at Nomura, referring to the upcoming meeting of the central bank on January 17-18.

“I think it is too early for the Bank of Japan to give up,” he added. “It still has ammunition to defend the 0.5% yield cap.”

The Bank of Japan described its move in December as aimed at addressing distortions in the bond market, and defended the new target of bond buying – but this is under enormous pressure now as traders sniff out a turnaround at next week’s meeting.

“Any change in policy this month would not be a setback for the yen,” said Jane Foley, strategist at Rabobank Forex. “However, we look to buy the yen against the dollar on dips in anticipation of another (policy) event…in the spring.”

The Bank of Japan is likely to raise its inflation forecast next week and discuss whether more steps are needed, sources familiar with the bank’s thinking told Reuters.

Meanwhile, US stock futures were slightly weaker, taking a breather after Nasdaq (nineteenth) It reached a one-month high overnight. European stock futures were also dull, with Eurostoxx 50 futures down 0.05%, German DAX futures down 0.04%, and FTSE futures up 0.02%.

Bloating bloating

Aside from Japan, market sentiment was dominated by US December inflation data which fell almost to consensus expectations. The annual pace of rise in core consumer prices slowed to 6.5% in December from 7.1% in November.

Investors responded by lowering expectations for US interest rates. The Fed is now almost universally expected to raise 25 basis points instead of 50 next month, and futures markets have priced in several rate cuts this year.

The dollar fell broadly, US Treasury bonds rose and assets seen as risky, such as stocks and cryptocurrencies, rose.

The US dollar fell 0.9% to a nine-month low of $1.0868 per euro and the risk-sensitive Australian dollar rose to a nearly five-month high of $0.6983.

Bitcoin rose by 5% to surpass $19,000.

But some analysts noted a caveat because service inflation remains flat and because federal policymakers are only talking about a slowdown in hikes in the near future, not a pivot to cuts.

“The market’s relief rests on strong evidence of inflation squared as the Fed nears the end of its tightening cycle,” said Vishnu Varathan, head of economics at Mizuho Bank in Singapore.

“However, inflation levels suggest that markets may be overly optimistic about the ‘pivot’.”

Oil extended its gains overnight – also helped by optimism about China’s reopening – and Brent crude futures were broadly flat at $83.82 in Asian morning trade.

South Korea’s central bank raised its policy rate by 25 basis points on Friday, as expected, and economists now think it may have reached the end of its picnicking cycle.

Editing by Lincoln Feist and Raju Gopalakrishnan

Our standards: Thomson Reuters Trust Principles.

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