Yesterday was finally the day that most Forex traders have been waiting for for at least a year: the day that the Bank of Japan (BoJ) dropped a hint that it will finally end its negative interest rate policy. Specifically, the BoJ Governor said – after his meeting with the Japanese Prime Minister – that monetary policy will be tightened from the end of the year. Indeed, the BoJ is buying a spectacular amount of JGBs to keep the YCC intact at absurdly low levels compared to where yields are in the rest of the developed world after almost two years of aggressive monetary tightening.
At its peak this year – after the BoJ loosened the rules on its YCC policy – the 10-year JGB was flirting with 1%, while the 10-year German bund yield was 3%, the 10-year UK gilt yield was 4.70% and the 10-year US Treasury yield was 5%. To be sure, inflation in Japan has lagged significantly behind inflation in Western peers, but inflation in the US is now exactly where inflation in Japan is: close to 3%.
The BoJ’s negative interest rate is the last vestige of the zero/negative interest rate era, and any small hint that things are moving there can move oceans. And that is exactly what happened yesterday. Speculation that the BoJ will raise rates as early as this month jumped to 45% shortly after Mr. Kuroda’s words reached investors’ ears. The yield on the 10-year JGB jumped to 0.80% from around 0.62% earlier in the week, in line with falling DM yields.
The USDJPY fell from 147 to 141 in a single move, and the pair is consolidating gains just below 144 this morning as traders debate whether or not a December normalization is too soon. Fundamentally, it is not: in any case, the BoJ will be starting to normalize policy two years after the Bank of England (BoE) raised rates for the first time in a long time. And the BoJ will be normalizing its rates when all the major central banks have stopped tightening, and when investors are guessing when normalization – in the other direction – will begin. So no, fundamentally it is not too early for the BoJ to start raising its policy rate. But it would be a sudden move – that’s for sure!
In any case, it is more likely than not that the Japanese Yen‘s fortunes will turn for good this week. In the short term, consolidation is the immediate response to yesterday’s knee-jerk rally – which immediately took the USDJPY into oversold conditions as the move was amplified by many traders covering their short positions. But from here, yen traders will be looking to sell on the tops rather than buy on the dips. A sustained move below 142.60 – the major 38.2% Fibonacci retracement of this year’s bullish trend – will confirm a return to the bearish consolidation zone, after which the pair is likely to take out the next major technical supports: the 200 DMA at 142.30, the next psychological support at 140, and then gently head back to – at least around 127 – where it started the year.
But these predictions will only hold if the BoJ doesn’t make a sudden U-turn on its normalization plans. Remember, the BoJ didn’t say it was going to normalize. It just said that it will be difficult to manage the actual policy for longer. If you can imagine, Governor Kuroda may have spent last night looking at the ceiling and wondering what I said. Funny thing is, the BoJ’s rate normalization speculation comes a few hours before the country announced a 2% drop in its GDP; obviously, the global policy tightening has been hard on the world economy, and Japan can’t escape the global slowdown winds. As it turns out, Japan may normalize its monetary policy when its economy starts to slow down.
Elsewhere
The nice jump in the Japanese Yen pulled the Dollar Index lower yesterday. Of course, the EURJPY, GBPJPY and AUDJPY all made a similar move. U.S. bonds, on the other hand, were little changed yesterday – for once – as traders sat on their hands ahead of this week’s highly anticipated U.S. employment data, while technology stocks were on fire yesterday. Alphabet jumped more than 5% after Google released Gemini – the largest and most powerful AI model it has ever built – and AMD jumped nearly 10% after the company unveiled a chip that will run AI software faster than rival products. But rival Nvidia was little affected by the news, with its chips up 2.40% yesterday. The demand for AI is big enough for everyone to profit handsomely.
Today, all eyes are on the US jobs report.
According to a consensus of analyst estimates on Bloomberg, the U.S. economy may have added 180,000 non-farm jobs in November, wages may have risen slightly faster on a monthly basis, and the unemployment rate is seen holding steady at 3.9%. The fact that the data released earlier this week pointed to a significant easing in the U.S. labor market leads many investors to believe that today’s official data will also follow the easing trend.
If the data is soft enough, the rally in the US bonds could continue and the US 10-year yields could have a taste of the 4% psychological mark, while a stronger-than-expected figure could help scale back the dovish Federal Reserve (Fed) expectations but could hardly bring the hawks back to the market before next week’s FOMC decision.
