Week Ahead – BoJ meets, US core PCE and UK CPIs also on tap

Following a barrage of central bank decisions this week the end credits of major monetary policy decisions for 2023 will roll with the BoJ during the Asian session Tuesday. At their last meeting, policymakers decided to allow 10-year JGB yields to rise above 1%. However, they did not ditch the cap. They just redefined it from a rigid ceiling to a reference bound, meaning they could intervene in the bond market again if deemed necessary. And indeed, this is what they did the day after the decision.

This disappointed investors that were expecting more, with the yen tumbling in the aftermath and the following days, with dollar/yen almost touching its October 2022 high of 151.94 on November 13. That said, it was all downhill thereafter with the fall steepening on December 7 as Governor Ueda talked about the possible options they have on interest-rate targeting once they end their negative interest rate policy.

However, just the next couple of days, two reports hit the wires, saying that his comments were not intended to hint at a potential exit timing and that the Bank sees the cost of waiting for more information as not very high. With that in mind and given the emphasis the BoJ puts on wage growth, policymakers may not opt for an imminent shift at this gathering and perhaps wait for April, after the spring wage negotiations.

That doesn’t mean the meeting will pass totally unnoticed. Yes, Japan’s GDP data revealed that the economy contracted by more than anticipated in Q3, but the National CPIs revealed that inflation continued to accelerate in October which increases the likelihood for businesses and labor unions to agree on another round of strong pay hikes next year. Thus, even the slightest indication that interest rates could exit negative territory in April may add more fuel to the yen’s engines, especially with the market believing that the Fed will cut interest rates by around 150bps next year.

However, investors were not convinced that another rate hike may be on the horizon. They are actually assigning around a 27% probability for a 25bps cut in January. In October, headline inflation slowed to just a tick above the Bank’s inflation-control target range of 1-3%, while the closely watched trimmed mean rate slid to 3.5% from 3.7%. Therefore, a further slowdown could take the probability of a January rate reduction higher and thereby weigh on the loonie.

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Earlier the same day, and a couple of hours ahead of the BoJ decision, the RBA releases the minutes of its December policy meeting, where policymakers kept their benchmark interest rate unchanged, but softened their tightening bias, saying that whether further tightening is required will depend upon the data and the evolving assessment of risks. With the market assigning a small probability of another quarter-point hike by the RBA in February, investors may go through the minutes and see how willing officials are to press the hike button one last time.

Written By: XM Group