BoJ sticks to ultra-loose policy, Japanese yen slides vs. USD

“USDJPY extended its rally as yen bulls were left disappointed by yet more dovishness from the Bank of Japan. The BoJ was unchanged with policy and said they’re not in a rush to raise rates until the spring wage negotiations. Governor Ueda said ‘it is difficult to present a firm picture on exit (from ultra easy policy)’ and that they ‘don't have a detailed picture on what steps and the order of it when it comes to exiting negative interest rates’. If you fancy a festive surprise though, Kuroda is due to deliver a speech on Christmas Eve to Japan’s Keidanren business lobby group. And today he said that policy change could involve an element of surprise”.

Yen forecast: ING sees “decisive” break for USDJPY below 140 in Q2 2024 In a Japanese yen forecast issued shortly after the Bank of Japan’s press conference, ING FX Strategist Francesco Pesole wrote that the BoJ would likely resort to normalising policy and deliver an interest rate hike in April next year:

“[...] We identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April.

From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24”.

Currency markets: Dollar index stays stable, pound rises

In other currency movements, the pound strengthened against the dollar, with the GBPUSD rate gaining 0.47% to reach $1.2707, outperforming the euro, which rose by 0.16% to $1.0941.

The U.S. dollar index registered a small decline of 0.30% to trade at 102.27. While it stayed above last week's four-week low of 101.75, it has recorded a fall of over 4% since early October. In its meeting last week, the Federal Reserve proved surprisingly dovish, providing reassurance to investors anticipating rate cuts in 2024 and contributing to the dollar’s overall downward trend.

Stock markets have surged following the Fed’s rate cut cues, with the Dow Jones Industrial Average recording multiple record highs in recent days.

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