European Summary and Highlights 19 Dec
USD/JPY continued to rise through the European morning, gaining another big figure and a half after gains in Asia, and reaching a high just below 145, as JGB yields continued to decline.
European morning session
USD/JPY continued to rise through the European morning, gaining another big figure and a half after gains in Asia, and reaching a high just below 145, as JGB yields continued to decline. The USD was otherwise modestly softer, with EUR/USD and AUD/USD up around 15 pips, and GBP/USD gaining half a figure. There was limited news, with the final Eurozone HICP for November in line with expectations.
USD/JPY gains continued despite the Japanese government upgrading their view of business sentiment for the first time in two months in December as a central bank survey showed broad recovery in the corporate mood thanks to upbeat profits. The latest report reflected the Bank of Japan's survey last week which showed business confidence at big Japanese manufacturers hit a near two-year high in the three months to December. Big non-manufacturers' sentiment also improved to levels not seen since 1991.
Asia session
To most market participants' surprise, not only the BoJ did not aggressively bring rates to zero percent, they did not even change their forward guidance. Given the latest inflation dynamics, it is surprising BoJ would not seize the time to hint a change of monetary policy. Yet, if BoJ only want to wait for the perfect moment to exit ultra-loose monetary policy, their rationale is still supported by the fact labor cash earning has not reached 2%. While BoJ kept forward guidance "The Bank will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target, as long as it is necessary for maintaining that target in a stable manner. It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds 2 percent and stays above the target in a stable manner. " intact, the text within the statement has stated "The year-on-year rate of increase in the CPI (all items less fresh food) is likely to be above 2 percent through fiscal 2024", which seems to suggest BoJ do see an exit of ultra-loose monetary policy but is waiting for wage growth to further pick up. As a knee-jerk response, the USD/JPY is up to 143.78 before retracing some gains to trade 0.48% higher at 143.44 with JGB yields sharply lower and U.S. Treasury Yields higher.
In RBA's December minutes, it showed that the Board considered whether to raise rates by 25bp or hold steady but decide not to as there are "encouraging signs" of progress on inflation. The remaining of the text showed data dependency remains key to future development and see inflation forecasted to be back in range by year end 2025, rather than mid 2025. It warrant some caution towards market participants who are anticipating an end to RBA's tightening and see the Aussie gaining. AUD/USD is trading 0.17% to 0.6718, NZD/USD is 0.24% higher at 0.6227, while USD/CAD is unchanged. Elsewhere, EUR/USD is unchanged and GBP/USD is 0.08% higher.