- https://tmsnrt.rs/2zpUAr4
- BOJ is under heavy pressure as it defends yield policy
- Yen hits 7-month high, yuan rises as dollar weakens
- Most Asian equities are supported by hopes for a quick Chinese recovery
- More profit ahead, many central bank speakers
SYDNEY (Portal) – Asian stocks strengthened on Monday as optimism over China’s reopening balance amid fears the Bank of Japan (BOJ) could ease its outsize stimulus policy at a crucial meeting this week during a holiday in US markets thin trade made sure of that.
The yen surged to its highest level since May after rumors surfaced that the BOJ could hold an emergency meeting on Monday as it struggles to defend its new yield ceiling amid massive selling. Continue reading
This sent fearful sentiment into local markets and Japan’s Nikkei (.N225) fell 1.3% to a two-week low.
But MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) was still up 0.9%, with hopes of an early reopening in China boosting it 4.2% last week.
Chinese blue chips (.CSI300) extended their rally, up 2.0%, while the yuan hit its highest level since July.
EUROSTOXX 50 futures were up 0.6%, while FTSE futures were up 0.1%. S&P 500 futures and Nasdaq futures rose 0.1% after a rally on Wall Street last week.
Earnings season is picking up steam this week, including Goldman Sachs, Morgan Stanley and first big tech name Netflix.
Leading politicians, policymakers and top corporate heads will attend the World Economic Forum in Davos, and there will be a variety of central bankers, including no fewer than nine Fed members, speaking.
The BOJ’s official two-day meeting ends on Wednesday and speculation is that it will make changes to its Yield Curve Control (YCC) policy as the market has pushed 10-year yields above their new 0.5% ceiling. Continue reading
The BOJ bought nearly 5 trillion yen ($39.12 billion) worth of bonds on Friday.
Early Monday, the bank offered to buy another 1.3 trillion yen of JGBs, but the yield remained at 0.51%.
“There is still a possibility that market pressures will force the BOJ to further adjust the YCC or exit the YCC,” analysts at JPMorgan said in a statement. “We cannot ignore this possibility, but at this time we do not consider it a main scenario.”
“Although domestic demand has started to recover and inflation continues to rise, the economy is not warming enough to tolerate a sharp rise in interest rates and the potential risk of sharp yen appreciation,” they added. “Therefore, we believe that the economic environment does not strongly support consecutive policy changes.”
THE YEN FLOATING
The BOJ’s ultra-loose policy has acted as an anchor of sorts for yields around the world while dragging the yen lower. Abandoning the policy would put upward pressure on yields in the developed markets and most likely see the yen strengthen.
The dollar is already at its lowest since May at 127.22 yen after shedding 3.2% last week and is threatening to break key support around 126.37.
The euro was also down 1.5% against the yen over the past week, but was helped by gains from a broadly weaker dollar, which hit a fresh nine-month high of $1.0872 on Monday.
All of this caused the US Dollar Index to fall to its lowest level since June at 101.780.
The dollar has been undermined by falling US bond yields as market bets that the Federal Reserve will hike rates less aggressively as inflation is clearly out of the way.
Futures are now implying almost zero chance of the Fed raising rates by half a point in February, with a quarter point move seen as a 94% chance.
10-year government bond yields are down to 3.51% after falling 6 basis points last week, close to their December low and key chart target of 3.402%.
Alan Ruskin, global head of G10 FX strategy at Deutsche Securities, said the easing of global supply constraints in recent months has proved to be a disinflationary shock, raising the chance of a soft landing for the US economy.
“Lower inflation itself encourages a soft landing through real wage gains, allowing the Fed to pause more easily and promoting a better behaved bond market with favorable implications for financial conditions,” Ruskin said.
“A soft landing also reduces tail risk from much higher US rates, and these reduced risk premia help global risk appetite,” Ruskin added.
The drop in yields and the dollar has benefited gold, which is up 2.9% last week to trade at $1,927 an ounce, its highest since April.
Oil prices also rallied last week on hopes that China’s imminent reopening would boost demand. Data on mobility, traffic and transport trips in China has shown a clear revival in movement ahead of the Lunar New Year holiday next week.
Chinese economic growth, retail sales and industrial production data due this week are sure to be bleak, but markets are likely to look beyond that to a quick recovery after coronavirus restrictions are lifted.
Prices edged lower on Monday, with Brent down 45 cents to $84.83 a barrel while US crude fell 38 cents to $79.48.
($1 = 127.8000 yen)
Reporting by Wayne Cole; Edited by Shri Navaratnam
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