Yen Surges on BOJ Talk of Liftoff

December 07, 2023
  • Financial conditions continue to loosen; ADP private sector jobs estimate was soft; other labor market data will be reported; BOC delivered another dovish hold; Mexico reports November CPI
  • ECB easing expectations continue to pick up; October eurozone IP data continue rolling out; the Swiss franc continues to strengthen
  • BOJ Governor Ueda roiled markets with comments on normalizing policy; we believe the BOJ has committed another communications blunder; Australia reported October trade data; China reported soft November trade data

The dollar is trading lower after the BOJ roiled markets with talk of rate hikes. DXY is trading lower near 103.963 after three straight up days. USD/JPY is the big mover after BOJ Governor Ueda’s comments (see below) and traded near 144.55, the lowest level since September 1 and testing that day’s low near 144.45. The pair is on track to test the August low near 141.50. The euro continues to underperform as ECB easing expectations pick up (see below) and is trading modestly higher near $1.0775 while sterling is trading higher near $1.2580. OF note, EUR/CHF traded at the lowest level since January 2015 (see below). At this point, it will likely take a string of firm U.S. data to truly challenge the current dovish Fed narrative. We continue to stress that the U.S. economy continues to grow at or above trend even as the rest of the world slips into recession, while price pressures remain persistent enough that the Fed will not be able to cut rates as soon and by as much as the markets think. The dollar should see another leg higher when market expectations for the Fed finally shift, though that may be a 2024 story.


Financial conditions continue to loosen. The Chicago Fed’s weekly measure through December 1 were the loosest since early February 2022. So far this week, yields fell, equities rose, and spreads narrowed and so conditions have likely loosened even further. If so, why is the market clamoring for rate cuts? And why would the Fed need to cut so aggressively with conditions so loose? While no change is expected next week, WIRP suggests 15% odds of a cut January 31, rising to nearly 70% March 20 and fully priced in for May 1 vs. June 12 at the start of last week. Five cuts are fully priced in by end-2024.

No wonder the U.S. economy remains robust. The Atlanta Fed’s GDPNow model is now tracking Q4 growth at 1.3% SAAR vs. 1.2% previously. Next update will be today after the data. October wholesale trade sales and inventories, consumer credit ($8.5 bln expected), and Q3 change in household net worth will all be reported. Of note, readings early in the quarter are typically volatile as more and more data are incorporated into the models. Elsewhere, the New York Fed’s Nowcast model is tracking 2.3% SAAR and will be updated tomorrow. Lastly, we’d note that the current early reads are based largely on strike-depressed October data. If November data bounce back as we expect, the Q4 estimates should rise accordingly.

ADP private sector jobs estimate was soft. It came in at 103k vs. 130k expected and a revised 106k (was 113k) in October. Of note, NFP has outperformed ADP the past two months but that really doesn’t mean a whole lot. Bloomberg consensus for NFP stands at 185k vs. 150k in October, while its whisper number stands at 160k. The unemployment rate is expected to remain steady at 3.9% while average hourly earnings are expected to fall a tick to 4.0% y/y. Ahead of that,

Other labor market data will be reported. November Challenger jobs cuts and weekly jobless claims will be reported today. Initial claims are expected at 220k vs. 218k last week, while continuing claims are expected at 1.91 mln vs. 1.927 mln last week.

Bank of Canada delivered another dovish hold. Rates were kept steady at 5.0% and noted that it sees further signs that its previous rate hikes are cooling spending. The bank added that the economy is no longer in excess demand, but stress that it wants to see further sustained easing in core inflation. Lastly, it said it remains concerned about the inflation outlook and is ready to hike again if needed. This was the bank's second straight dovish hold and markets have listened. WIRP suggests 10% odds of a rate cut January 24, rising to 60% March 6 and fully priced in for April 10 vs. June 5 at the start of last week. Four cuts are priced in by the end of 2024. This seems very unlikely.

Mexico reports November CPI. Headline is expected at 4.40% y/y vs. 4.26% in October, while core is expected at 5.32% y/y vs. 5.50% in October. If so, headline would accelerate for the first time since December and move away from the 2-4% target range. At the last policy meeting November 9, Banco de Mexico kept rates steady but softened its hawkish tone. Next meeting is December 14, and no change is expected. Last week, Governor Rodriguez said a rate cut in early 2024 was possible while Deputy Governor Espinosa was against the change in guidance, noting that inflationary risks remain and are growing. Upcoming inflation readings will be key in determining if a cut is possible at the February 8 or March 21 meetings. The swaps market is pricing in around 60% odds of a cut at the February meeting, while 50 bp of total easing is priced in over the next six months.


European Central Bank easing expectations continue to pick up. WIRP suggests 5% odds of a cut December 14, rising to 20% January 25, 75% priced in for March 7 and fully priced in for April 11 vs. June 6 at the start of last week. A sixth cut by the end of next year is now over 50% priced in vs. 50% odds of a fifth cut at the start of this week. Of note, Villeroy said that with inflation falling, “This is why, barring any shock, there will be no further increase in our rates - the question of a reduction may arise in 2024, but not now.”

October eurozone IP data continue rolling out. Germany came in at -0.4% m/m vs. 0.2% expected and a revised -1.3% (was -1.4%) in September, while the y/y WDA rate came in at -3.5% vs. -3.0% expected and a revised -3.6% (was -3.7%) in September. Elsewhere, Italy came in at -0.2% m/m vs. -0.4% expected and a revised 0.1% (was 0.0%) in September, while the y/y WDA rate came in at -1.1% vs. -1.4% expected and -2.0% in September. Italy also reported October retail sales at 0.4% m/m vs. -0.1% expected and -0.3% in September. Eurozone-wide IP will be reported next Wednesday.

The Swiss franc continues to strengthen. EUR/CHF traded as low as .94036 today, the lowest since January 2015, when the SNB surprised markets by eliminating the floor for this pair. This move comes despite the lower than expected November CPI data earlier this week that pushed forward SNB rate cut expectations. What seems to be happening here is that ECB easing expectations have picked up by even more than the SNB. Two cuts by the SNB are priced in by the end of 2024 vs. nearly six by the ECB. The Swiss National Bank meets next Thursday. While no change in policy is expected, we expect the SNB to push back against this CHF strength, first by jawboning and then by intervening if needed. With Swiss inflation already moving further below the 2% target and the economy slowing, further franc gains would be undesirable.


Bank of Japan Governor Ueda roiled markets with comments on normalizing policy. He said there are various options for the policy rate when the tightening cycle begins, including the overnight lending rate. Ueda added there are also many options for a tiered system when the bank raises rates. That said, he said it was too early to do an exit simulation but stressed that the bank needs to communicate it beforehand to ensure a smooth exit. These comments come a day after Deputy Governor Hamani downplayed the potential negative impact of hiking rates. As a result, Bank of Japan liftoff expectations have shifted back to April vs. June at the start of this week. Furthermore, WIRP suggests nearly 35% odds of a move this month vs. zero at the start of this week. JGB yields rose and the yen strengthened, with USD/JPY trading as low as 144.55, the lowest level since September 1 and testing that day’s low near 144.45. The pair is on track to test the August low near 141,50.

We believe the BOJ has committed another communications blunder. After stressing this past month of the need to see the outcomes of the spring wage negotiations before considering liftoff, the bank blind-sided the markets with talk of normalization. Some will say the bank was merely laying the groundwork for an eventual move but why do it now? Policymakers were enjoying a fairly favorable equilibrium with the markets; the yen remained relatively weak but within narrow trading ranges, while JGB yields had stabilized. With the economy going through a soft patch in Q3 and Q4, this was simply not the time to trigger a strong yen and higher yields.

Australia reported October trade data. Exports came in at 0.4% m/m vs. a revised -1.8% (was -1.4%) in September, while the y/y rate improved to -11.9% vs. a revised -14.3% (was -14.0%) in September. Of note, exports of iron ore rose 7.5% m/m, while coal rose 5.9% m/m, suggesting some pickup in demand from mainland China. Elsewhere, imports came in at -1.9% m/m vs. a revised 8.0% (was 7.5%) in September, while the y/y rate improved to 2.4% vs. a revised 2.3% (was 2.0%) in September.

China reported November trade data. Exports came in at 0.5% y/y vs. 0.0% expected and -6.4% in October, while imports came in at -0.6% y/y vs. 3.9% expected and 3.0% in October. This was the first positive reading for exports since April, but soft imports suggest domestic demand remains weak.  

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