The BOJ meets today, with the Nikkei reporting that it is poised to end its negative interest rates policy (NIRP), yield curve control (YCC) and its purchases of risk assets including ETFs. If so, this will mark Japan’s first rate hike since 2007, and see the BOJ reverting to a single policy rate without YCC. YCC was introduced in Sep 2016 after negative interest rates were deemed as not sufficiently accommodative, and is a policy perhaps incongruent with an expected rate hike from negative to zero. But it is still likely for the BOJ to intervene in JGB markets when necessary to smooth volatility. For markets, a reversal from NIRP is partially expected, but USD/JPY had stayed buoyant around 149 as few expect another rate hike from the BOJ afterwards. We see a risk for market assumptions of a dovish BOJ rate outlook to be challenged given sharp wage gains, equity market strength, rising productivity growth, and a multi-decade high in loan growth. If the BOJ delivers a less dovish outlook following its rate hike, expect a bump up in JGB yields and a rebound in the JPY, with USD/JPY possibly easing towards 148.
USD/CNH remains stable at around 7.20, as strong China data for February balanced out USD strength. China’s fixed asset investment for Jan-Feb was stronger than expected at 4.2% y/y, as investment in manufacturing and services outpaced the decline in real estate. Property sales remain moribund with a decline of 32.77% y/y, but property is also becoming a less important RMB driver given rock-bottom expectations, and policy support for construction activity to continue. Meanwhile, the PBOC has firmly anchored the RMB by keeping the onshore USD/CNY fixings little changed at around 7.09.
USD/KRW had rebounded towards 1340, with the KRW weighed by heavy equity outflows last Friday. Geopolitics may be a catalyst, with US Secretary of State Blinken visiting South Korea for a Summit of Democracy on Sunday. Yesterday, North Korea launched several short-range ballistic missiles in response, and it had also criticized the US-led summit. Even with geopolitical tensions, the KRW sell-off looks somewhat stretched. USD/KRW could ease again if the JPY strengthens post-BOJ, and if the upcoming FOMC meeting does not pose any surprises for the USD.
Quote of the day
“I can't change the direction of the wind, but I can adjust my sails to always reach my destination."
Jimmy Dean
19 March in history
In 1918, the US Congress established time zones and approved daylight saving time.
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