InvestMacro

By ForexTime

The Japanese Yen has been the best-performing G10 currency versus the US dollar since end-October.

And there’s certainly been a lot of interest for JPY late, considering how our Dec 20th report was FXTM’s most-read article for all of 2022 (“Why is the Japanese Yen soaring?”).

The Japanese Yen could be set for more near-term gains …

as the Bank of Japan holds its policy meeting amidst these other economic data releases and events in the days ahead:

Monday, January 16

• AUD: Australia December inflation gauge
• World Economic Forum begins in Davos – attended by central bank heads, finance ministers, and global business leaders
• US markets closed

Tuesday, January 17

• AUD: Australia January consumer confidence
• CNH: China 4Q GDP; December industrial production, retail sales, jobless rate
• EUR: Germany January ZEW survey
• GBP: UK November unemployment rate, December jobless claims
• CAD: Canada December inflation
• USD: New York Fed President John Williams speech
• S&P 500: Q4 earnings by Goldman Sachs, Morgan Stanley, United Airlines

Wednesday, January 18

• JPY: Bank of Japan rate decision
• EUR: Eurozone December CPI (final)
• GBP: UK December CPI
• USD: US December retail sales, industrial production, Fed Beige Book
• USD: Fed Speak – speeches by Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan, Philadelphia Fed President Patrick Harker

Thursday, January 19

• JPY: Japan December external trade
• AUD: Australia January consumer inflation expectations; December unemployment
• NOK: Central Bank of Norway’s rate decision
• EUR: ECB publishes December meeting minutes; ECB President Christine Lagarde speaks at Davos
• USD: US weekly initial jobless claims; Fed Speak – speeches by Boston Fed President Susan Collins, New York Fed President John Williams

Friday, January 20

• JPY: Japan December CPI
• CNH: China loan prime rates
• EUR: Germany December PPI
• GBP: UK December retail sales

USDJPY has been dropping on expectations for an eventual BoJ rate hike.

To be clear, markets are only forecasting a mere 38% chance that we could see a Bank of Japan rate hike on Wednesday, January 18th.

But recall that markets are forward-looking in nature; today’s prices reflect tomorrow’s expectations.

And markets currently fully expect the BoJ to finally see a rate liftoff in April, under the helm of the central bank’s new incoming governor.

If so, Japan can finally exit its negative interest rates regime, having kept its benchmark rate at negative 0.1% since 2016.

Also, here’s a recap of recent events that have spurred the surge for the Japanese Yen:

• December 20: BoJ policy shocker
  The BoJ unexpectedly allowed Japanese 10-year yields to reach a limit of 0.50% – which is double the prior ceiling of 0.25%.
• January 12: Yomiuru report
  The Japanese national newspaper claimed that BoJ officials will, over the coming week, “review the side-effects” of its ultra-loose policy stance.
• January 13: Yields cap breached
  Recall the new 0.5% cap for Japan’s 10-year yields? That level was breached today, forcing the Bank of Japan to make unscheduled bond purchases to try and reinforce the cap (more bond buying, lower yields)

These events have prompted markets to believe that more policy tightening is on the cards for 2023.

And such hopes have translated into JPY gains.

Week Ahead: Potential scenarios for USDJPY

With all that in mind …

• if current BoJ Governor Haruhiko Kuroda pushes back against the market’s expectations for a rate hike this year, that may prompt the Japanese Yen to unwind some of its recent gains and potentially pull USDJPY back above the psychologically-important 130 mark.
• On the other hand, should markets detect the slightest of hawkish hints (BoJ is getting closer to a rate hike) out of Governor Kuroda next week, that should move USDJPY closer towards 126.0 and potentially test the lower downtrend line that began in November.

  And if the Yomiuru report proves true, AND the BoJ’s review does show that side-effects of its ultra-loose policy settings are proving harder to contain, suggesting a faster-than-expected exit from negative interest rates, that may translate into further JPY gains as well.

At the time of writing, market forecasts are currently giving a slight edge that we’ll see USDJPY back at 130 over the next one-week period, with such odds being placed at 70%, compared to the 65% chance that we’ll see USDJPY touch 127.0.

READ MORE: 3 potential winners in 2023

But wait, there’s more!

Also look out for these other two potential catalysts that could move USDJPY over the coming week:

• December 20: Japan inflation data

Japan’s national consumer price index (CPI) – which measures headline inflation – is forecasted to come in at 4%.

If so, that would be the fastest inflation since January 1991!

Rising inflationary pressures might prompt the BoJ to follow in the footsteps of its major central banking peers who have been aggressively hiking their own interest rates last year in a bid to quell red-hot inflation.

Hence, a higher-than-expected CPI out of Japan next week may reinforce bets for a BoJ rate hike in 2023, likely translating into further gains for the Japanese Yen.

• Fed Speak in the coming week

The USD side of USDJPY could be moved by any policy clues contained within scheduled speeches by officials of the US central bank – the Federal Reserve a.k.a. the Fed.

Markets expect the Fed to hike by just 25 basis points at its next policy decision due on February 1st, which is a far cry from the supersized 75-bps hikes that we saw four times last year.

It’ll be interesting to get these Fed officials’ takes on the slowdown in the US headline CPI that we just received yesterday (6.5% CPI for December; much lower than June’s 9.1%).

If these Fed officials fuel expectations that the slowdown in US inflation in turn allows the Fed to ease up on its rate hikes, that could translate into more Dollar weakness and further declines for USDJPY.

After all, the US dollar has been weakening since late September on the notion that the worst of the Fed rate hikes are now behind us.

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com

By JustMarkets

The US indices continued to rise amid declining inflationary pressures. By the trading day’s close, the Dow Jones index (US30) gained 0.64%, and S&P500 (US500) added 0.34%. The NASDAQ Technology Index (US100) increased by 0.64% on Thursday.

The US consumer price index fell from 7.1% to 6.5% (forecast 6.5%) on an annualized basis. Core inflation (which excludes food and energy prices) also slowed year over year from 6% to 5.7% (5.7% forecast). Lower inflationary pressures have increased bets that the Federal Reserve will move to smaller hikes. According to CME Group’s Fedwatch tool, investors now estimate a nearly 95% chance that the Central Bank will raise rates by 25 basis points on February 1. Philadelphia Fed President Patrick Harker supported a 0.25% hike next month, while St. Louis Fed President James Bullard prefers that the Fed maintain the pace of rate hikes.

Weekly initial US jobless claims came in at 205,000, below the expected 215,000. Many market participants are looking for signs of weakness in the labor market as another signal of slowing inflation.

Today is the start of the reporting season in the United States. As usual, the banking sector will report first. Analysts are predicting weak data, with the expectation that Q4 2022 earnings will be worse than Q3. But this does not apply to retailers, which may show good results at the end of the quarter due to Christmas sales.

Equity markets in Europe rose yesterday. Germany’s DAX (DE30) gained 0.74%, France’s CAC 40 (FR40) added 0.74%, Spain’s IBEX 35 index (ES35) jumped by 1.30%, Britain’s FTSE 100 (UK100) closed 0.89% on Thursday.

Gold prices hit an eight-week-high. A decline in US inflation increases the likelihood that the US Federal Reserve will move to a slower interest rate hike, which is positive for precious metals. Gold and silver are inversely correlated to the dollar Index and US government bond yields.

Lower inflationary pressures have returned investors’ appetite for risky assets, including oil. Crude oil futures rose for the fifth time in seven days, with WTI crude for February increased by 1.3% yesterday. London Brent crude oil for March delivery jumped by 1.7%. The fundamental picture is now pointing toward further growth in oil prices.

Asian markets were mostly on the rise yesterday. Japan’s Nikkei 225 (JP225) gained 0.01%, China A50 (CHA50) added 0.32%, Hong Kong’s Hang Seng (HK50) increased by 0.36%, India’s NIFTY 50 (IND50) fell by 0.21%, while Australia’s S&P/ASX 200 (AU200) was up 1.18% on the day.

The Japanese government’s Higher Economic Policy Commission invited eight economists, including inflation and monetary policy experts, to upcoming special meetings to discuss the country’s long-term policy. Analysts believe that these meetings are intended to discuss the strategy of the Bank of Japan’s exit from the soft monetary policy program and the development of a new agreement between the Bank of Japan and the government.

S&P 500 (F) (US500) 3,983.17 +13.56 (+0.34%)

Dow Jones (US30) 34,189.97 +216.96 (+0.64%)

DAX (DE40) 15,058.30 +110.39 (+0.74%)

FTSE 100 (UK100) 7,794.04 +69.06 (+0.89%)

USD Index 102.22 -0.97 (-0.94%)

• – China Trade Balance (m/m) at 05:00 (GMT+2);
• – UK GDP (m/m) at 09:00 (GMT+2);
• – UK Industrial Production (m/m) at 09:00 (GMT+2);
• – UK Manufacturing Production (m/m) at 09:00 (GMT+2);
• – French Consumer Price Index (m/m) at 09:45 (GMT+2);
• – Spanish Consumer Price Index (m/m) at 10:00 (GMT+2);
• – Eurozone Industrial Production (m/m) at 12:00 (GMT+2);
• – US Michigan Consumer Sentiment (m/m) at 17:00 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Mary M. McCarthy, Drake University 

Japanese Prime Minister Fumio Kishida is set to sit down with President Joe Biden at the White House on Jan. 13, 2023.

The bilateral meeting in the U.S. is the final stop for Kishida in a five-day tour of allies that has also seen him visit France, Italy, the U.K. and Canada. It comes as Japan takes over the presidency of the G-7, with leaders of the seven largest economies due to meet in Hiroshima in May.

It also marks the first visit to the White House by a Japanese prime minister since the country revamped its defense priorities with the release of its National Security Strategy in December 2022. The new strategy supports a more robust and assertive security stance by Japan in the face of shifting geopolitical and domestic realities. The new defense plan forms the backdrop to the meeting with Biden.

As an expert on U.S.-Japan relations, I believe the National Security Strategy is the lens through which the meeting should be viewed, with a focus on four key items.

1. Underscoring the US-Japan alliance

The preeminent goal of the leaders’ meeting will be to emphasize the strength and importance of the U.S.-Japan alliance, both rhetorically and in substance.

The two governments will likely seek to display to both foreign and domestic audiences that Japan and the U.S. are in lockstep on foreign policy priorities. Both countries have framed “democracy” and “the rule of law” as common values underpinning the U.S.-Japan alliance, and there is no reason to believe that Biden or Kishida will deviate from that line, especially regarding their shared vision of a “free and open Indo-Pacific.”

Given the context of the meeting, such rhetoric can have substantive consequences and shed some light on how the alliance is being positioned within, and may evolve after, Japan’s latest shift in its defense strategy. Japan’s National Security Strategy is ambitious in its development of new strategic capabilities, including counterstrike measures, and represents unprecedented financial commitments from the Japanese government. Yet Japan can only achieve its new defense goals in close cooperation with the U.S. As a result, Japan will be looking for Biden’s fulsome show of support for both the bilateral alliance and Japan’s new defense strategy.

But the meeting isn’t all about satisfying Japanese concerns – framing the U.S.-Japan alliance as solid and stable supports Biden’s objective of reinvigorating relationships with U.S. allies and acts as a deterrence to any country seeking to disrupt the status quo in the Indo-Pacific region.

2. Addressing regional tensions

Over the past decade, the security environment in Asia has become more dangerous.

Since the Russian invasion of Ukraine in 2022, this is even more so the case. North Korea has become emboldened, knowing that Russia and China are unlikely to act against its provocations in the current geopolitical environment. It is telling that North Korea tested more missiles in 2022 than in any previous year.

Meanwhile, Chinese president Xi Jinping has reasserted his desire of reuniting Taiwan with the mainland during his tenure, holding large-scale military exercises around the island mere days before the U.S.-Japan meeting.

The U.S. views the steps being laid out in Japan’s new defense strategy to be important for regional security as a form of deterrence against aggression from China and North Korea and as a means for the U.S. and Japanese militaries to work together more seamlessly in the event of conflict in the region. The White House meeting provides an opportunity for Biden and Kishida to reiterate their common regional concerns and display a united resolve against any saber-rattling in the region.

3. Confronting Russian aggression

As both the current G-7 president and as a non-permanent member of the United Nations Security Council for 2023-24, Japan will have to confront the main geopolitical drama playing out on the global stage: the Russian war in Ukraine. The new National Security Strategy illustrates how the Japanese government’s view of Russia has shifted, from a potential strategic partner to a strategic threat. Japan has also voiced concerns that Russia could join forces with China in ways that undermine regional security.

These changes in the Japanese government’s perception of Russia bring it more in line with the U.S. position and will likely be reflected in the way in which the Russian invasion of Ukraine is addressed between the two leaders at the White House meeting.

4. Economic security

In 2021, Japan created a cabinet-level post of economic security minister, and the importance of insulating the economy from outside threats was reiterated in the National Security Strategy.

A priority is working toward securing supply chain resilience in the face of existing – or potential – disruptions from pandemics, climate change, military conflict or politically motivated actions, such as withholding needed goods or services by other governments.

Both the U.S. and Japan have emphasized that a crucial part of supply chain resilience is partnering with like-minded nations. As such, a plan for enhanced economic and technological cooperation is among the topics likely to be discussed by the two leaders.

… so how much of this is about China?

The U.S.-Japan bilateral summit is not all about China – conspicuously, China was not mentioned by name in either the White House announcement of the planned content of Friday’s meeting between Biden and Kishida or in the White House overview of the two leader’s last meeting in Cambodia in November 2022.

Yet, China looms large for the U.S. and Japan in each of these four areas, as both seek to enhance the two nations’ defense, diplomatic and economic ties – and will likely never be far from the surface of what is being discussed.

About the Author:

Mary M. McCarthy, Professor of Political Science, Drake University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

By JustMarkets

The US indices rose yesterday as investors bet that today’s US consumer price data will show a further slowdown in inflation. At the close of the stock market yesterday, the Dow Jones index (US30) increased by 0.80%, and the S&P500 index (US500) added 1.28%. The technology index NASDAQ (US100) gained 1.76% on Wednesday.

Important inflation data will be released in the US today. Economists expect the Consumer Price Index to decline from 7.1% to 6.5% year-over-year in December. The December consumer price index reading will determine the pace at which the US Federal Reserve will continue to raise rates. Expectations of further signs of easing inflationary pressures will support a less hawkish Fed stance (0.25% hike at the next meeting). Conversely, if the data disappoints, especially in core inflation, then the US Fed may leave a high rate of growth in interest rates (increase by 0.50% at the next meeting).

Federal Reserve Bank of Boston President Susan Collins said yesterday that she is leaning toward supporting a 0.25% interest rate hike at the central bank’s next meeting on February 1st. According to Collins, moving to a smaller step away from a more aggressive rate hike would give officials more time to see how their actions affect the economy.

Stock markets in Europe rose yesterday. Germany’s DAX (DE30) gained 1.17%, France’s CAC 40 (FR 40) jumped by 0.80%, Spain’s IBEX 35 (ES35) added 0.15%, and the British FTSE 100 (UK100) closed by 0.40% on Wednesday.

ECB spokesman De Kos said yesterday that the ECB would continue to raise interest rates at future meetings at a steady pace. This coincides with comments from other ECB officials. Analysts are currently forecasting 2 consecutive 0.5% hikes at the next ECB meetings. This is a green flag for the European currency, as the euro will benefit from a higher risk appetite on the back of the Chinese opening outlook and the Federal Reserve’s aggressive policy slowdown.

Oil jumped by 3% yesterday despite a large increase in US crude oil inventories. That’s because oil traders are betting on easing rate hikes due to lower inflation. Meanwhile, analysts at Goldman Sachs are predicting an oil price in 2023 above $100 a barrel. According to experts, a barrel of Brent oil could reach $110 by the third quarter if China and other Asian economies are fully open from the constraints associated with the coronavirus.

Asian markets were mostly up yesterday. Japan’s Nikkei 225 (JP225) gained 1.03%, China’s FTSE China A50 (CHA50) added 0.07%, Hong Kong’s Hang Seng (HK50) ended the day up 0.49%, India’s NIFTY 50 (IND50) decreased by 0.10%, and Australia’s S&P/ASX 200 (AU200) ended the day up 0.90%.

China has begun lifting its ban on Australian coal imports. This move is the first concrete step taken to improve relations between the countries. The fact that the decision is coming from China suggests that the country is looking for ways to mend relations with Western countries, relations with which have soured amid increased competition between the US and China. The resumption of coal imports from China boosts Australia’s main commodity sector. Before the unofficial ban, China was one of the largest markets for Australian coal.

China’s Consumer Price Index increased from 1.6% to 1.8% year-over-year. Consumer inflation, which reflects prices between factories and plants, decreased by 0.7% in December. The improved inflation data indicates that the removal of COVID-19 restrictions is indeed having a positive effect on China’s economy and may signal a larger economic recovery later this year. Business activity indicators also indicate a slight improvement in conditions, although the overall activity is still below average. But markets are concerned that rising infections could hinder a more significant near-term economic recovery.

S&P 500 (F) (US500) 3,969.61 +50.36 (+1.28%)

Dow Jones (US30) 33,973.01 +268.91 (+0.80%)

DAX (DE40) 14,947.91 +173.31 (+1.17%)

FTSE 100 (UK100) 7,724.98 +30.49 (+0.40%)

USD Index 103.25 +0.01 (+0.01%)

• – China Consumer Price Index (m/m) at 03:30 (GMT+2);
• – China Producer Price Index (m/m) at 03:30 (GMT+2);
• – US Initial Jobless Claims (w/w) at 15:30 (GMT+2);
• – US Consumer Price Index (m/m) at 15:30 (GMT+2);
• – US Natural Gas Storage (w/w) at 17:30 (GMT+2).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.