During the Asian session on Wednesday (December 21), the U.S. dollar index fluctuated within a narrow range and is currently trading around 103.96. On Tuesday, the U.S. dollar index was dragged down by the U.S. dollar against the yen, closing down 0.66% at 103.97; the U.S. dollar index closed at 103.97; It fell about 3.8% on Tuesday, the largest one-day rise in 24 years. It hit a four-month high as low as 130.57 and closed at 131.69 after the Bank of Japan unexpectedly adjusted its government bond yield control plan, shocking the market.
Although the Bank of Japan generally kept its policy unchanged, fixing the short-term Japanese government bond yield at minus 0.1% and the 10-year government bond yield at around 0%, it allowed the latter to float 50 basis points above and below the 0% target, and the floating range was expanded from the previous 25 basis points.
The move shocked investors, who were already worried about the economic consequences of rising global interest rates and uncontrollable inflation.
In the aftermath of the Bank of Japan's interest rate decision, the yen surged; the U.S. dollar fell sharply 3.8% against the yen to close at 131.655, having earlier hit 130.57, the lowest since early August.
The timing of the decision came as a surprise, with most BOJ watchers not expecting any changes before Governor Haruhiko Kuroda's 10-year term ends at the end of March.
Canadian Imperial Bank of Commerce (CIBC) Capital Markets Bipan Rai, head of North American foreign exchange strategy, said: "We originally thought this was more like a thing in early 2023, not now."
Rai said: "The Bank of Japan adjusted Adjusting its yield curve control policy was a key driver in overnight foreign exchange markets ”
html The 410-year Japanese government bond yield jumped to 0.46% from the previous limit of 0.25%, and pushed the 10-year U.S. Treasury yield to its highest level so far this month.
The dollar has been retreating after soaring this year, as investors increasingly believe that the Federal Reserve is close to completing its aggressive rate hikes.
CIBC's Rai said: "The medium-term risks for USD/JPY are tilted to the downside...given the sheer size of the USD/JPY market, this should drive moves in other currencies as well."
The U.S. dollar index had gained nearly 19% this year through the end of September, but has now given back much of its gains, with year-to-date gains narrowing to about 9%.
The yen generally rose on Tuesday, The euro fell as much as 3.5% against the yen , hitting 140.17 yen, its lowest level since late September. GBP/JPY fell as much as 3.7%, hitting its lowest since October 12 at 160.34 yen.
euro/dollar was up 0.12% at $1.0621. As investors took a wait-and-see attitude towards riskier assets, the Australian dollar , which is regarded as a representative of risk appetite liquidity, fell 0.3%, hitting a one-month low to 0.6628 during the session. fell in late trading and closed at 0.6679.
At the press conference after the announcement, Bank of Japan Governor Haruhiko Kuroda tried to emphasize that this adjustment was "not a rate increase" but to improve the function of the bond market. He reiterated that it was too early to discuss withdrawing stimulus measures.
Jane Foley, head of foreign exchange strategy at Rabobank (Rabobank), said: "The yen has remained strong after the decision was announced, indicating that the market does not believe Kuroda."
"What the market is seeing now is that the Bank of Japan has opened a crack in the door for further tightening of policy, and the market seems quite certain that this may come in the spring," Foley added, the dollar against the yen may fall to 125 yen.
Important economic data and events on Wednesday
Events: None.
Institutional view
Brown Brothers Harriman: The Bank of Japan is expected to raise interest rates next year
The Bank of Japan adjusted the yield target range to ±0.5% on Tuesday. The market reacted very quickly and aggressively to this, and bets on the Bank of Japan's monetary normalization increased. The Bank of Japan has let the genie out of the bottle, perhaps a bit too hastily. However, the Bank of Japan is no stranger to creating surprises and is expected to raise interest rates next year.
Societe Generale : As the Bank of Japan stimulates to hedge , the yen's surge has just begun
Societe Generale said that on Tuesday, Bank of Japan Governor Haruhiko Kuroda announced that he would double the 10-year government bond yield ceiling. This sudden policy adjustment shocked the market and also increased the pressure on the country's international investors to hedge their foreign assets. It is expected to further push up the yen exchange rate. Juckes, chief foreign exchange strategist at Societe Generale, said that as Japanese fund managers slowly adapt to the Bank of Japan's more hawkish stance, the U.S. dollar exchange rate against the yen may fall to 125 in January next year. The currency fell more than 3% against the exchange rate on Tuesday, which means that the yen will rise another 6% from the current level in the future.
Nomura: The Bank of Japan hopes to reactivate the bond market, even at the cost of a stronger yen
The Bank of Japan’s efforts to defend its yield curve control (YCC) target have led to a continued evaporation of bond market liquidity and what analyst called a bond market “failure”. The Bank of Japan currently holds more than half of Japanese government bonds, compared with 11.5% when Haruhiko Kuroda became governor of the Bank of Japan in March 2013. Nomura Securities Chief Japan Economist Kyohei Morita said it is best to view the Bank of Japan's move as a policy adjustment rather than a full-scale reversal. "The Bank of Japan may want to reduce the negative impact of the YCC policy. They want to reactivate the bond market, even at the expense of the yen's appreciation."
Mizuho: The Bank of Japan will adjust policies to ease pressure on the yen
Japan's decision to expand the yield target range is interpreted as a sign of testing the waters, and the Bank of Japan may withdraw economic stimulus measures aimed at stimulating demand and raising inflation. However, the Bank of Japan is still firmly implementing the bond purchase plan, claiming that this is only a fine-tuning and not the beginning of a policy reversal. Mizuho Bank said that market trends reflect people's sudden bets that the Bank of Japan will shift to a hawkish policy, but the market's bets do not mean that this is an established policy, nor does it mean the bank's policy intentions. "Indeed, judging from the nature of the move or related communiqués, our base view is that the Bank of Japan will adjust policy to ease pressure on the yen, but will not become significantly hawkish, as the Bank of Japan is still trying to emphasize that easing policy is continuing."
Commerzbank: Assessing monetary policy becomes more difficult under the new head of the Bank of Japan
The Bank of Japan finally took action and expanded the 10-year government bond yield target. Commenting on how to assess today's action, Commerzbank economists said that given that global yields are rising, allowing a wider range of target yields is reasonable. But at the same time, the Bank of Japan increased purchases to better defend the new target, which diluted the impact of the decision. Commerzbank said it may be the first time the Bank of Japan has acknowledged upward pressure on yields, and it also paves the way for Haruhiko Kuroda's successor, who will take office in the spring. "At least we now know that the Bank of Japan can also take action. This may make it more difficult to evaluate monetary policy under the new Bank of Japan governor."
This article comes from Huitong.com
