Daily Technical Analysis

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The Bank of Japan kept the same outlier as compared to the other major central banks which have been raising interest rates at a fast pace throughout this year in a synchronized attempt to bring the inflation down. This resulted in a down yen and fording Japanese authorities to step in in the currency market in September and October. But, after hitting a 32-year low against the USD, the yen staged a comeback, with the BoJ coming under the microscope as investors try to figure out whether a policy tweak is on the cards sooner rather than later. The Bank meets early on Tuesday, but no policy action is expected.

Governor Kuroda has been strict on the need to maintain ultra-low interest rates and pushed back against calls for reviewing the policy framework. He has been also repeating that the rise in core consumer prices is driven mostly by surging import costs and that inflation would return back to 2% during the next fiscal year.

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The Reserve Bank Board considered three options in its deliberations at the December Board meeting. The options were: 50 basis point increase in the cash rate; 25 basis point increase; or no increase. This contrasts with recent meetings when only the 50 basis point and 25 basis point options were considered. Given consistent statement from the Bank about pausing it would come as no surprise that the Board did consider the pause. Indeed, it came as a bigger surprise that 50 basis points was still on the table.

The cause of pausing rested on the theme of placing further emphasis on the lagged effects of a large policy adjustment to date, and the value in proceeding cautiously in an uncertain environment. But this argument seemed to be quickly dismissed, noting that the Bank’s forecasts in the November SOMP were that, despite further increases in interest rates, “inflation was expected to take several years to return to the target range”.

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Consumer price inflation took a small step down in November, to 6.8% YoY, after holding steady at 6.9% through September and October.

Canadians got some relief at the pumps in November, with prices down 3.6% m/m, after prices surged 9.2% in October. However, gasoline prices are still up 13.7% versus a year ago.

Food inflation was back on the rise in November, up 10.3% y/y, up from 10.1% in October. Food purchased from stores was up even more versus a year ago at 11.4% y/y.

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The Japanese yen has edged higher on Thursday. In the European session, USD/JPY is trading at 132.09, down 0.27%.

The dust has settled after Tuesday’s dramatic events, when the yen shot up 3.7%. This followed the Bank of Japan’s shocking announcement that it would widen its yield curve control on 10 year bonds from 25 bp to 50 bp. The markets were completely blindsided, which could very well be what Bank of Japan was hoping for.

The markets hadn’t expected any policy moves until after Boj Governor Kuroda ends his term in April, but now there is talk of major policy moves before then, such as raising interest rates out of negative territory. The BoJ released minutes yesterday, but these are minutes of November meeting.

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Euro fell below parity with the USD in October. Since then, it has rebounded, but hasn’t returned to the levels at the start of the year. Naturally, the question is whether the pair will continue the trend higher, or turn around for another run at parity. And what does this mean for Euro crosses.

One of the main drivers of the fluctuation in the shared currency last year is likely to be the theme for next year as well. At least through the first half. And that is the ECB’s unique approach to a unique challenge facing the Euro. Other currencies operate within a single economic jurisdiction, but the ECB has to balance the fiscal policy of 19 different countries.

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Beginning of last week, forex traders were expecting to ease into the holidays with relatively low volatility trade until BOJ Governor Kuroda fired off big of a monetary policy decision, tweaking the central bank’s yield curve control program and effectively raising interest rates by 25bps. This marked a potential sea change for the BOJ and is seen as a precursor to normalizing monetary policy after a decade of ultra-easy policy.

Based on the initial market reaction, one of Japan’s most prominent monetary policy academics, Takashi Ito, noted earlier today that Kuroda’s bazooka ‘may have hit its mark’ and that the BOJ could start ‘hitting its inflation target on a more sustainable basis ‘ in 2023 and beyond.

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The US dollar is showing strong gains against the majors yesterday, with the exception of the Japanese yen. EUR/USD has tumbled by 1.27% and is trading at 1.0528 in Europe.

EUR/USD is sharply lower, despite a very light economic calendar. The only release of note is German CPI, which was released yesterday. Despite the lack of fundamentals, the USD is taking advantage of risk aversion in the markets. There are headwinds everywhere we look. The war in Ukraine, the threat of recession in the US and the eurozone and China’s slowdown all make for a gloomy outlook as we start the new year.

Germany’s inflation has been falling, and the downtrend is expected to continue. The consensus for December CPI is 9.0%, compared to 10.0% in November. If the consensus proves accurate, it could put further pressure on the euro, as the ECB may have to reconsider its hawkish stance on rate policy.

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The Minutes from the December FOMC meeting showed that Fed members observed that a slowing of interest rate increases would allow the central bank to assess the progress on inflation and employment. Recall that the FOMC slowed the pace of interest rates increase to 50bps from 75bps the prior four meetings. However, that didn’t mean they were happy with the current situation. Powell mentioned in his press conference that they “Welcome the reduction in the monthly pace of price increase, but it will take substantially more evidence to give confidence that inflation is on a sustained downward path.”

In addition, the summary of economic projections showed that no one expects rate cuts in 2023, as the median forecast for rates increased from 4.6% to 5.1%. As a result, participants felt that ongoing rate increases are “likely appropriate”. The committee also noted the need for flexibility and optionally in policy decisions and that unwarranted easing in financial conditions could complicate their effort to restore price stability.

The US Dollar Index barely moved on the release of the Minutes, remaining within a range between 104.24 and 104.31.

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Today brings this week’s most important data releases both from the Euro area and the US.

In Euro area, flash inflation print for December will be released. Individual country data released thus far suggest that while headline inflation probably continued to decline in December, underlying price pressures remain strong. Consensus is looking for core inflation to have picked up from 5.0% in November to 5.1% in December. Going forward, interpretation of euro area inflation data will become more and more cumbersome as country-specific fiscal measures that compensate households for the rising energy costs will also affect consumer price developments.

In the US, it is time for December payrolls. Consensus expects 200k new jobs while a figure around 100k would be consistent with demographic developments and any higher number implies labor shortages are likely to prevail in US jobs market, upholding wage and price pressures. We will also get IMS Services index where consensus looks for a decline to 55.0 in December from 56.5 in November. Factory orders are also expected to have declined in November.

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Gold came off its earlier highs while silver turned a touch lower in what has been a quietish day. The US dollar fell further lower, extending it sharp losses from Friday when weak ISM data raised speculation that the Fed will be forced to cut interest rates again towards the back end of this year. But the dollar typically rises in Q1, which I something that could undermine the gold rally. In terms of the immediate term and this week, we have two key risk events that could move the dollar thus gold price.


Jerome Powell’s speech is expected while US CPI data for December will be released on Thursday. Both of these macro events have the potential to move dollar sharply again, after a double whammy of bearish news sent the greenback tumbling on Friday, and Monday.


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