European Summary and Highlights 19 Mar
The JPY continued to weaken through the European morning, following the decline seen overnight after the BoJ decision.
European morning session
The JPY continued to weaken through the European morning, following the decline seen overnight after the BoJ decision. USD/JPY opened around 150.30 but traded up to 150.70 before edging back to 150.50. The USD was generally firmer. EUR/USD dropped 20 pips to 1.0845, and AUD/USD lost around 10 pips to 0.6510 following the overnight decline. EUR crosses were mostly not much changed, although EUR/CHF moved modestly lower and EUR/SEK made gains early in the session, although these were reversed by the end of the morning.
There wasn’t much news, but the German ZEW data came in on the strong side of expectations, with the forward sentiment indicator particularly strong, reaching its highest for 2 years. Eurozone Q4 wage data showed a sharp decline to 3.1% y/y, supporting the case for earlier ECB easing.
Asia session
The BoJ has decided to exit negative interest rate in the March meeting. The BoJ has raised short term interest rate from -0.1 - 0% to 0 - +0.1%, signalling YCC is officially removed, yet bond purchase operation persists at the same magnitude and any spike in long term JGB yield will be met with BoJ's response (intervention). The BoJ will also discontinue the purchase of ETFs and REITs as "it came in sight that the price stability target of 2 percent would be achieved in a sustainable and stable manner toward the end of the projection period of the January 2024 Outlook". The forward guidance changed to " Given the current outlook for economic activity and prices, it anticipates that accommodative financial conditions will be maintained for the time being." suggests the BoJ do not see tightening with the current outlook. It does not come as a surprise as headline labor earnings and wage negotiations results have been upbeat. The forward guidance is more dovish than expect as it does not suggest any more tightening within the current outlook. USD/JPY rose by 0.69% to 150.17 as JGB yields dip further than U.S. T-Yields.
As per our forecast, RBA kept rates at 4.35% citing easing but still high inflation figure. It is expected as CPI has been moderating along with RBA's forecast but the latest monthly CPI remains above target range at 3.4% y/y. The change in forward guidance to "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out." is important because it is opening the path to easing once CPI returns to range. AUD/USD dropped 0.59% to 0.6526 , NZD/USD slipped 0.43% to 0.6059 while USD/CAD rose 0.14% with oil down 20 cents. Elsewhere, EUR/USD is down 0.05% and GBP/USD is down 0.11%.