The strongest to the weakest of the major currencies
The EUR is the strongest and the JPY is the weakest as the North American session begins. The USDJPY is the strongest after the BOJ did not extend the cap to 1.5% on the 10-year JGB yield. They formalized the 1% cap. The move sent the USDJPY back above the 150.00 level on that decision and that run has continued with the pair reaching toward the high from last week at 150.772 (see chart below). The low price yesterday reached down to 148.797 – just short of the 148.738 low from October 17 (see chart below).
Some highlights from the statement from the BOJ:
- Keeps short-term interest rate target at -0.1%
- Keeps 10-year JGB yield target around 0%
- Widens reference range to 1.0% point up and down each around its 10-year JGB yield target vs previous 0.5% point
- Flexibly increase JGB buying, fixed-rate operations and collateral fund-supply operations
- Changes language around 1.0% 10-year JGB yield cap
- Decides to keep yield target but make 1% a reference cap
- Will guide market operations nimbly
- Will regard upper bound of 1% for 10-year JGB yield as reference in its market ops
- Will determine offer rate for fixed-rate JGB buying ops each time, taking account market rates and other factors
- Decides to make YCC more flexible
- Japan’s inflation outlook overshooting but due largely to prolonged rises in import costs
- Wages, prices must strengthen in virtuous cycle
- BOJ will patiently continue monetary easing under YCC to support economic activity, create environment where wages rise more
- Appropriate to make YCC more flexible given very high uncertainty over economy, markets
- Strictly capping long-term rate with fixed-rate purchase operation at 1% will have strong positive effects but could also entail large side effects
- As such, boj decided to conduct YCC mainly through large-scale JGB buying and nimble market operations
- BOJ makes no change to its forward guidance
The CPI was raised over the next 3 years. The new expectations show:
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- Board’s core CPI fiscal 2023 median forecast at +2.8% vs +2.5% in July
- Board’s core CPI fiscal 2024 median forecast at +2.8% vs +1.9% in July
- Board’s core CPI fiscal 2025 median forecast at +1.7% vs +1.6% in July
The GDP forecasts were mixed:
- Board’s real GDP fiscal 2023 median forecast at +2.0% vs +1.3% in July
- Board’s real GDP fiscal 2024 median forecast at +1.0% vs +1.2% in July
- Board’s real GDP fiscal 2025 median forecast at +1.0% vs +1.0% in July
Meanwhile, the Federal Open Market Committee is starting a two-day meeting, with the Fed expected tomaintain the current Fed funds target rate of 5.25% to 5.5%. Investors will closely watch the accompanying policy statement and comments from Fed Chair Jerome Powell for insights into future interest rate decisions. Powell has highlighted uncertainties related to inflation and the potential economic impact of policy changes. Other factors such as rising U.S. Treasury yields, strong economic data, and geopolitical tensions in the Middle East add complexity to the central bank’s decisions.
In China overnight, manufacturing activity unexpectedly shrank in October, with the manufacturing purchasing managers’ index (PMI) reading 49.5, indicating
