- BoJ’s Ueda hints at end to negative rates by year-end if wages rise
- Dollar starts week on the backfoot as crucial CPI data awaited
- China hopes lift aussie, equities; easing Apple (NASDAQ:AAPL) selloff helps stocks too
Ueda sparks BoJ policy speculation
The Japanese yen shot higher on Monday, climbing against all of its major peers after Bank of Japan Governor Kazuo Ueda fanned speculation of an early exit from ultra-easy policy in an interview with the Yomiuri newspaper over the weekend. In rather hawkish comments that took markets by surprise, Ueda appeared to flag a possible end to negative interest rates should inflation and wage growth data move in the right direction by the end of the year.
Japan has seen both headline and core inflation rise and stay above the BoJ’s 2% target since the spring of 2022. But wage growth has started to moderate in recent months, raising doubts as to whether or not inflation can sustainably hold around 2%. But it’s not just wages losing steam lately. The economy in general has lost a bit of momentum during the third quarter so Ueda’s year-end timeline is somewhat questionable.
It's likely that Ueda’s remarks were aimed primarily at speculators attacking the yen, which had shed more than 12% of its value versus the US dollar this year before today’s gains pared them closer to 11%.
Having defended its stimulus policies for so long, it would be out of character for the BoJ to hasten its exit before its goals are fully met. Nevertheless, Ueda’s comments suggest that policymakers have already begun discussing possible ways of winding down all the stimulus, including negative interest rates, and that they are contemplating doing so when the target is within sight rather than already reached.
Yen leaps as dollar backtracks ahead of US data
Thus, this could still mark a turning point for the bruised yen, which raced to one-week highs against the dollar today, briefly breaching the 146 level. Its gains against other majors such as the euro and pound were more modest, however, in a likely sign that its rally versus the greenback is partly being fuelled by some dollar weakness at the start of the new trading week.
The August CPI report is due out of the US on Wednesday to be followed by retail sales numbers a day later. They will be the last pieces of the economic puzzle before the Fed meets on September 19-20 to deliberate whether to keep rates on hold or to hike by 25 basis points.
With a number of Fed officials hinting at a pause before entering the blackout period, the odds of a hike next week are near zero. However, with CPI expected to edge up to 3.6% in August and the latest ISM PMIs pointing to an improvement in the economy, a November rate hike is far from being taken off the table.
This suggests that the dollar’s pullback today is a natural correction after eight consecutive weeks of gains against a basket of currencies.
Euro and pound regain some posture
The euro and pound both pounced on the weaker US currency to stem their bleeding amid a deteriorating outlook in Europe and the UK. The ECB will decide on Thursday whether to raise rates one final time or to pause for a bit before making that call.
Even the Bank of England is considering pausing following signs of cracks in the housing and jobs markets in the UK. The latest employment report due tomorrow and the monthly GDP print on Wednesday should reveal more.
Aussie and stocks cheer light at the end of China tunnel
The biggest rebound, though, on Monday came from the Australian dollar, as it surged almost 1% on hopes that China’s economic woes may be easing.
Producer prices in China fell at a slower rate on a yearly basis in August compared to July, while consumer prices edged up 0.1% y/y after declining the previous month.
Moreover, authorities announced new measures on Sunday to encourage more investment by insurance companies in the stock market, while more and more cities appear to be loosening housing curbs to boost property sales.
Although further defaults by property giants cannot be ruled out, investors are finally able to see some light at the end of the tunnel and China’s CSI 300 index ended the day 0.7% higher.
US futures were also in positive territory as the selloff in Apple’s stock eased on Friday. The Cupertino company will unveil its latest iPhone offering on Tuesday so the buzz surrounding the event could be shoring up the stock today. But it’s also possible that traders overreacted slightly to the news that China is banning the iPhone for government employees, which was seen as a tit-for-tat move to Washington’s growing trade barriers against Beijing.