Japanese yen gains after BoJ meeting, euro dips

Japanese yen rallies to one-week high as markets see signals of BoJ normalising monetary policy

The Japanese yen was volatile on Tuesday, initially weakening following the Bank of Japan's (BOJ) decision to maintain its ultra-easy policy settings but gaining strength as markets interpreted signals hinting at a potential end to the negative interest rate policy.

Despite the fluctuations, the USD/JPY exchange rate eventually traded flat at 148.0 per dollar, having reached a low of 148.6 and a high of 146.9.

The yen's sensitivity to interest rate differentials between Japan and other markets has led to a nearly 5% decline against the dollar this year. This trend is attributed to the shift in market expectations regarding imminent U.S. rate cuts.

BOJ Governor Kazuo Ueda, while providing no explicit indications about pulling short-term Japanese interest rates out of negative territory in the upcoming March or April meetings, acknowledged the gradual increase in the likelihood of Japan achieving the bank's 2% inflation target. Ueda also highlighted that many businesses had already decided on wages in early Shunto wage negotiations, a process typically occurring in the spring, with labor unions seeking higher pay.

Christopher Wong, a currency strategist at OCBC, told Reuters:

"BOJ doesn't need to wait till Shunto wage negotiations end before assessing whether to normalise policy. Back-to-back annual wage increases (by a larger magnitude this year) is probably something Japanese officials are hoping to see before making a move. This could well imply that (the) March meeting is live”.

Markets.com Chief Market Analyst Neil Wilson also weighed in on the dynamics in his market overview on Tuesday, saying the Japanese yen wasn’t alone in gaining against the dollar:

“The yen rose as the Bank of Japan left rates unchanged but talked up progress on achieving its inflation target and sounded optimistic on wage negotiations taking place this spring. The BoJ left its short-term rate at 0.1% and yield curve control envelope unchanged. April is the consensus now, though the BoJ did marginally lower its inflation outlook for fiscal 2024. The yen rallied to its best in a week, with USDJPY dipping below 147.

But it was not a mere yen move — sterling and the euro also rose against the dollar as it was offered across the piece, DXY futures bouncing off the 50-day line to strike a fresh one-week low”.

The euro notably declined by close to 0.3% against the USD after the comment was issued.

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Yen forecast: MUFG says JPY unlikely to strengthen on a more sustained basis

In a yen forecast issued after the BoJ meeting on Tuesday, analysts at Japan’s MUFG Bank wrote that it was “premature” to expect the Japanese currency to strengthen in the near term:

“The comments from today’s policy meeting support our view that the BoJ will exit negative rates at the April policy meeting rather than waiting until June. It was backed up by Governor Ueda indicating ‘we can make some judgements on wages at smaller companies by looking at other economic data and from hearings with companies’.

While we expect the BoJ’s exit from negative rates to encourage a stronger yen alongside rate cuts from other major central banks such as the Fed, recent price action has highlighted that it is still likely premature to expect the JPY to strengthen on a more sustained basis at the current juncture”.

Euro declines against USD and GBP, dollar index steady

In other currency movements, the euro to dollar rate saw a 0.28% decline to $1.0855 as European investors assessed a survey of euro zone banks, gauging the impact of monetary policy tightening on the economy.

The poll revealed that while lenders continued to tighten credit access in the last quarter of 2023, the pace was slower than in the previous two years.

"It seems that almost all the transmission from tighter monetary policy to financial conditions has now happened," said economists at Nomura quoted by Reuters. "For some hawks this may be a concern, potentially pushing out when they think rate cuts should happen. However, we think that the majority of (ECB) Governing Council members are satisfied with the degree of tightening, which has already happened, are pleased that the transmission is slowing down. Hence, we expect cuts from June 2024."

The European Central Bank meets on Thursday. No changes in interest rates are expected, but investors will be closely monitoring what the ECB says about its outlook. Current market pricing suggests a reasonable chance of a rate cut by April, as per Reuters.

The British pound remained steady against the dollar at $1.2713 but achieved its strongest level against the euro since September, with the EUR to GBP rate reaching 85.47.

Key British economic news included a smaller-than-expected budget deficit for December, potentially creating room for tax cuts in the scheduled March budget.

The U.S. dollar index (DXY) was last up 0.25% at 103.59.

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