JPY rebound reinforced by BoJ rate hike signal

JPY: Governor Ueda delivers strongest rate hike signal   

The yen has been the best performing G10 currency at the start of this week. It has resulted in USD/JPY falling to an intra-day low overnight of 155.31 as it moves further below the high of 157.89 set on 20^th November. The yen’s recent rebound has been reinforced by hawkish comments from Governor Ueda overnight who signalled a higher likelihood of the BoJ resuming rate hikes this month. In response the Japanese rate market is now pricing in around 21bps of hikes for the next policy meeting on 19^th December compared to around 15bps at the end of last week. It has lifted the 2-year JGB yield above 1.00% for the first time since 2008. In a speech to business leaders in Nagoya, Governor Ueda stated that the BoJ “will consider the pros and cons of raising the policy interest rate and make decision as appropriate” at the upcoming policy meeting. He added that real interest rate still at a very low level. The comments send the strongest signal yet the BoJ is preparing to resume rate hikes this month in line with our forecast. Market participants have remained wary over pricing in an earlier rate hike given uncertainty over whether the government would push back against it.

However, Governor Ueda noted that “I think I’ve had frank, good discussions at face- to face meetings with the prime minister and economic ministers since last month. I intend to continue keep close communications”. After signalling a rate hike could be delivered this month, one would assume that Governor Ueda has had implicit approval  from the government. He went on to add that adjusting the degree of accommodation will be necessary “to guide Japan’s economy on to a long-term growth plan, which will ultimately lead to the success of efforts undertaken by the government and the bank thus far”. Overall, the developments are supportive for the yen, and our forecast for USD/JPY to drop back towards the 150.00-level by early next year. The sharp yen sell-off since Sanae Takaichi won the LDP leadership election and became prime minister was driven both by investor concerns that the BoJ would leave rates on hold for longer and the government would run much looser fiscal policy to reflate Japan’s economy.  An earlier BoJ rate hike should help to ease some of those concerns after the government announced a larger extra budget totalling JPY21.3 trillion last month.                       

JPY HAS CLEARLY UNDERPERFORMED IN RECENT MONTHS

Source: Bloomberg, Macrobond & MUFG GMR

USD: New Fed Chair pick in focus for performance of US dollar

The correction lower for USD/JPY over the past week has been encouraged as well by the dovish repricing of Fed rate cut expectations. After failing to sustain levels above the 100.00-level for the second time in November, the dollar index has fallen to a low of 99.317 overnight. The US rate market has now fully priced in another 25bps rate cut at the 10^th December FOMC meeting.  The main driver remains comments at the end of last month from New York Fed President Williams who stated he still sees room for a cut this month. At the same time, downward pressure on short-term US yields has been supported by building speculation over who will become the next Fed Chair. President Trump stated yesterday that he has decided on his pick to be the next Fed Chair and that “we’ll be announcing it”. The exact timing of the announcement remains unclear but it could come as soon as this week. US Treasury Secretary Scott Bessent previously indicated it would come before Christmas.

It was reported last week that White House National Economic Council Director Kevin Hassett is likely to become the next Fed Chair according to people familiar with the matter. Kevin Hassett stated in an interview last week that he expects President Trump to “pick somebody who’s going to help them have cheaper car loans and easier access to mortgage at lower rate”. It was reported that President Trump’s decision to pick Kevin Hassett reflects his trust and desire to push for more aggressive rate cuts. If Kevin Hassett is confirmed as the next Fed Chair it would support our forecast for the US dollar to weaken further in the year ahead. However, we have seen recently that FOMC views on the policy outlook have become more divided. We expect more dissents this month if the Fed decides to lower rates again, and a more hawkish signal to indicate a pause at the start of next year. A more divided FOMC would make it harder for the new Fed Chair to continue lowering rates next year, and should help dampen the immediate negative USD reaction if Kevin Hassett is confirmed this week. 

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com