Weekly Wrap Up & What to Look for the Week
Last Friday trading session, the USD-JPY currency pair witnessed a significant and noteworthy decline, primarily influenced by comments made by Bank of Japan (BoJ) Governor Ueda. Governor Ueda highlighted the escalating challenges in policymaking, particularly as we approach the fiscal year-end in March 2024. Notably, there was a sharp increase in the implied policy rate for April 2024, serving as a potential harbinger of changes in the new fiscal year. Speculation has been gaining traction, suggesting the possibility of a policy shift occurring as early as the upcoming December 2013 BoJ meeting.
The pronounced move in USD-JPY appears to be a result of a positioning clear-out, coupled with a contraction of the gap between yield differentials and USD-JPY, which had widened during the month of November. While Governor Ueda's comments have introduced an element of uncertainty into the upcoming December 19 BoJ meeting, deeming it "live," I believe that a more probable scenario for a policy shift would align with a quarterly forecast review, possibly in meetings scheduled for January, April, July, or October.
JPY bulls are now confronted with an additional challenge, given the impending release of wages data for October, anticipated to reveal a persistently subdued pace. A recent survey conducted by Reuters among Japanese businesses indicates that only 51% of them expect to raise wages more rapidly than core inflation, citing various cost challenges on different fronts.
Simultaneously, the USD has exhibited a broader weakening trend against most currencies within the G10 FX basket, reflecting the substantial downturn observed in USD-JPY. Notably, there has been a relative lack of significant US-centric news. The dovish signals from Tuesday's Job Openings and Labor Turnover Survey (JOLTS) release, combined with softer-than-expected ADP (Automatic Data Processing) and unit labour cost data, contribute to a prevailing dovish sentiment.
The focus on the Eurozone's economic landscape continues to reveal a gloomy picture, particularly evident in the latest data. German industrial production contracted by 0.4% month-on-month (MoM), against a consensus expectation of 0.2%, resulting in a year-on-year (YoY) decline of 3.5% (consensus -3.0%). The ongoing downtrend in output will probably persists well into 2024, especially with manufacturing orders continuing to slide. Additionally, the final reading for Q3 Eurozone GDP confirmed a 0.1% quarter-on-quarter (QoQ) contraction.
Despite the market making a case for 140 basis points (bp) of easing in 2024, the European Central Bank (ECB) remains resolute in its focus on bringing inflation back to target rather than solely underpinning weak economic growth. ECB officials, including Francois Villeroy, emphasize the need for patience in maintaining a tight policy stance, cautioning against premature expectations of a rate cut. Villeroy's colleague, Peter Kazimir, dismisses suggestions of a Q1 2024 rate cut as "science fiction."
Meanwhile, the USD-CAD currency pair faces a conundrum, with mixed signals emerging from the Bank of Canada (BoC). The recent meeting left policy unchanged as expected, accompanied by a statement containing both dovish and hawkish elements. The statement acknowledged success in "restraining spending" and highlighted an economy that is "no longer in excess demand." However, it also alluded to risks associated with inflation and expressed readiness to "raise the policy rate further if needed."
Economists offer a succinct summary, acknowledging mounting factors pressuring inflation but noting that they may not be sufficient to drive it consistently to the 2% target. More insights into the policy outlook are anticipated with the release of the BoC's Economic Progress report and a speech by Deputy Governor Toni Gravelle. Economists project the policy rate to likely remain at 5.00% until mid-2024, anticipating rate cuts to commence in Q3 2024.
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