Yen Sinks on Dovish BOJ Comments

February 08, 2024
  • Fed officials continue to echo Chair Powell’s cautious stance on easing; growth remains strong in Q1; weekly jobless claims will be closely watched; Mexico is expected to keep rates steady at 11.25%; Peru is expected to cut rates 25 bp to 6.25%
  • A fireside chat with ECB Chief Economist Lane is today’s eurozone highlight; BOE MPC member Mann speaks; Czech Republic is expected to cut rates 25 bp to 6.5%; new Turkey central bank Governor Karahan sounded hawkish
  • BOJ Deputy Governor Uchida sounded dovish; Japan reported December current account data; China deflation is deepening; India kept rates steady at 6.5%, as expected

The dollar is broadly firmer as the yen leads the foreign currencies lower. DXY is trading higher near 104.239 after two straight down days. The yen is the worst performer after dovish comments from BOJ Deputy Governor Uchida (see below). USD/JPY is trading at a new high for this move near 149.15 and is on track to test the November high near 152. The euro is trading lower near $1.0765 while sterling is trading lower near $1.2610. When all is said and done, recent developments support our view that the Fed is unlikely to cut rates anytime soon. The data continued to come in on the firm side while Fed officials remain cautious about easing (see below). We still believe that the current market easing expectations for the Fed still need to adjust significantly. These expectations have started to shift but more needs to be seen, even after the Fed’s hawkish hold and the January jobs data.


Fed officials continue to echo Chair Powell’s cautious stance on easing. Kugler said “At some point, the continued cooling of inflation and labor markets may make it appropriate to reduce the target range for the federal funds rate. On the other hand, if progress on disinflation stalls, it may be appropriate to hold the target range steady at its current level for longer to ensure continued progress on our dual mandate.” Collins said, “Seeing sustained, broadening signs of progress should provide the necessary confidence I would need to begin a methodical adjustment to our policy stance,” adding that “it will likely become appropriate to begin easing policy restraint later this year.” Barkin said “I am very supportive of being patient to get to where we need to get. I see, at this point, the tradeoff - which is coming into better balance - as still being in favor of continuing to work on inflation.” He added that “Declaring victory is very enticing, but you’re never going to hear me do that.” Barkin speaks twice today.

Market pricing is adjusting, albeit slowly. Odds of a March cut have fallen to 2o% from being fully priced in at the start of 2024. A May cut is no longer seen as a sure thing either, with odds falling to around 80%. A total 125 bp of easing is still priced in for 2024, however. While the repricing process has begun, there is a long way to go. Our base case right now is that the first cut comes in June, followed by cuts in September and December so that the Fed only cuts rates 75 bp this year, consistent with the December Dot Plots.

Growth remains strong in Q1. The Atlanta Fed’s GDPNow model is now tracking growth at 3.4% SAAR vs. 4.2% previously. The early estimates are often volatile, and the next update comes today after the data. December wholesale trade sales and inventories will be reported. Elsewhere, the New York Fed’s Nowcast model’s Q1 estimate stands at 3.3% SAAR vs. 2.8% previously and will be updated tomorrow. Its estimates for Q2 will begin in early March.

Weekly jobless claims will be closely watched. Last week, claims rose unexpectedly but the impact was quickly negated by the strong jobs report. Initial claims are expected at 220k vs. 224k previously, while continuing claims are expected at 1.876 mln vs. 1.898 mln previously. There is no Bloomberg consensus yet for February NFP, but its whisper number currently stands at 22k vs. 353k reported for January.

Banco de Mexico is expected to keep rates steady at 11.25%. Ahead of the decision, Mexico reports January CPI data. Headline is expected at 4.88% y/y vs. 4.66% in December. If so, it would be the third straight month of acceleration to the highest since June. No wonder Banco de Mexico remains hawkish. We expect a hawkish hold today. A cut at the next meeting March 21 will only be possible if inflation starts to fall again. The swaps market is pricing in 25 bp of easing over the next three months, followed by another 50 bp over the subsequent three months.

Peru central bank is expected to cut rates 25 bp to 6.25%. Since the easing cycle began in September, the bank has cut rates 25 bp at every meeting and is likely to continue this pace. The market sees the policy rate bottoming at 4% by end-2025.


A fireside chat with ECB Chief Economist Lane is today’s eurozone highlight. Vujcic and Wunsch also speak. Easing expectations remain elevated despite ongoing pushback from most ECB officials. Markets continue to price in nearly 65% odds that the easing cycle begins April 11, while a total 125 bp of easing is seen this year.

Bank of England MPC member Mann speaks. The topic is “Inflation Dynamics and drivers: looking under the bonnet.” Mann has emerged as the leading hawk on the MPC. Since the last hike in August, she (along with Haskel) has dissented at every meeting in favor of a 25 bp hike to 5.50%. Of note, the market sees 100 bp of rate cuts over the next 12 months, starting in June. In our view, the risk is that the BOE does not deliver this much easing, partly because the projected UK fiscal drag in 2024 will likely be softer as Chancellor Hunt is expected to announce pre-election tax cuts at the March 6 Spring Budget.

Czech National Bank is expected to cut rates 25 bp to 6.5%. However, the market is split as nearly half of the analysts polled by Bloomberg look for a larger 50 bp cut. We believe the risk is that the bank eases more aggressively. Vice Governor Frait warned he was prepared to back at least a 50 bp cut, “certainly more than 25” due to household demand and inflation pressures softening. Meanwhile, CNB board member Holub said he was “pretty open to discussing a 50 bp cut.” The market is pricing in 300 bp of easing over the next 12 months followed by another 50 bp over the subsequent 12 months that would see the policy rate bottom at 3.25%. However, the easing cycle will depend in large part on the persistence of the broad disinflationary trend currently underway. The CNB will provide updated macroeconomic projections.

New Turkey central bank Governor Karahan sounded hawkish. Whilst presenting the bank’s quarterly inflation report, Karahan said “Monetary policy will be tightened if inflation expectations, pricing behavior, government spending, tax policy, wages and private consumption lead to a significant deviation from our inflation outlook expectations.” However, he added that more hikes were not needed “at the moment.” Deputy Governor Akcay added “We are trying to implement a monetary tightening system where a 45% policy rate is enough.” The bank forecasts inflation at 36% at end-2024, 14% at end-2025, and 9% at end-2026. This path seems highly unlikely if rates are cut aggressively this year as markets project. The swaps market is pricing in a policy rate of 33.25% over the next 12 months, 20.75% over the subsequent year, and 17.5% over the year after that.


Bank of Japan Deputy Governor Uchida sounded dovish. He noted that “Even if the bank were to terminate the negative interest rate policy, it is hard to imagine a path in which it would then keep raising the interest rate rapidly.” Uchida was cautious and noted that “Given that this large-scale easing has been in place for more than 10 years, regardless of the timing of policy revision, the Bank needs to devise both communication and market operations so as not to create discontinuity in financial markets before and after the revision.” He added “The Bank would, I think, maintain accommodative financial conditions even if the termination were to take place.” He also sounded cautious about ending Yield Curve Control, stressing that “It’s unthinkable that we’d suddenly just stop buying bonds.”

The market was already pricing in a very modest tightening cycle. Before Uchida’s comments, the swaps market saw 25 bp of tightening over the next 12 months, followed by only 35 bp more over the subsequent two years. Those expectations are little changed today. Of note, liftoff is still seen in June.

Japan reported December current account data. The adjusted surplus came in at JPY1.81 trln vs. JPY1.93 trln expected and JPY1.89 trln in November. However, the investment flows will be of more interest. The December data showed that Japan investors turned net buyers of U.S. bonds (JPY622 bln) for the fourth time in five months. Japan investors turned net buyers (JPY40 bln) of Australian bonds again and remained net sellers of Canadian bonds (-JPY82 bln) for the sixth straight month and for ten of the past eleven months. Investors turned net buyers of Italian bonds (JPY11 bln) again. Overall, Japan investors turned total net buyers of foreign bonds (JPY1.08 trln) for the fourth time in five months. With Japan yields likely to move higher in 2024, it’s possible that Japan investors will stop chasing higher yields abroad but it’s still too early to say for sure.

China deflation is deepening. January CPI came in at -0.8% y/y vs. -0.5% expected and -0.3% in December, while PPI came in at -2.5% y/y vs. -2.6% expected and -2.7% in December. This is the deepest CPI deflation seen since September 2009. Of note, pork prices fell -17% y/y and helped drag food prices down -5.9% y/y. These deflation risks are not going away anytime soon and so we expect further easing by the PBOC in the coming months.

Reserve Bank of India kept rates steady at 6.5%, as expected. It was a hawkish hold by a 5-1 vote, and the bank maintained its policy stance at “withdrawal of accommodation.” Governor Das stressed that “The job is not yet finished and we have to be vigilant of new supply shocks.” Nonetheless, the swaps market is pricing in the start of an easing cycle with a 25 bp cut over the next three months.  

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