Weekly Market Update 23 December – Dollar ended the week lower at 104.3 after the Bank of Japan loosens the bond yield cap
Weekly Market Update 23 December – Dollar ended the week lower at 104.3 after the Bank of Japan loosens the bond yield cap
1. Dollar edged lower to around 104.3 by the week’s end despite upbeat economic data on the back of cooling inflation and a surprise move by the Bank of Japan. On Tuesday, the Greenback saw a sharp pushdown after the BOJ announced that it would loosen its 10 year bond yield cap from 0.25% to 0.5%. This caught investors completely off guard, and its yield rate subsequently jumped to 0.499%, its highest level since 2015. Low interest rates and bond yields had previously driven out a significant volume of capital to the extent that Japan became the largest holder of US government bonds, owning almost USD $1.3 Trillion of debt. Higher JGB yields have boosted expectations of a repatriation of investments back into the Japanese bond market as its differential with US securities narrows, which could weigh down the Dollar. The Greenback managed to pare some of these losses on Thursday upon the news of upbeat GDP and unemployment claims data. GDP growth of 3.2% rebounded at a faster pace than the expected 2.9% in the third quarter, representing a significant turnaround from the previous quarter’s report of -0.6% which initially sparked some worries of a recession. Similarly unemployment claims of 216k were lower than expectations of 221k, indicating a still-tight labour market. However, the recent bout of optimism was short-lived as the m/m Core PCE Price Index of 0.2% released on Friday represented the third consecutive month of falling inflation growth, which sparked fears that the Fed could reverse its aggressive rate hikes sooner than expected and caused the Dollar to decline. On a broader view, the Dollar has historically been soft in December following seasonal trends, and rose in January for the past 4 years. In line with historical performance, economists at Wells Fargo currently expect the Dollar to rally 2% in Q1 2023, but decline more significantly by 10% thereafter as the US slips into a recession in the second half of 2023.
2. Aussie and Loonie extended their rally to end the week higher at 0.672 and 0.735 respectively against the Dollar, while Kiwi edged lower to close at 0.627. On Tuesday the RBA’s meeting minutes indicated that the central bank had considered pausing rate hikes, but ultimately remained committed to raising interest rates until inflation was brought under control to its target of 2%. The most recent data for Q3 showed that inflation in Australia still remains far above that target at 7.3%, largely driven by a tight labour market. Canada also saw similar upbeat economic data. Core retail sales of 1.7% came in higher than expectations of 1.3%. m/m CPI of 0.1% was higher than expectations of 0% growth for the month, while the y/y median CPI of 5.0% similarly beat market expectations. Meanwhile monthly GDP growth of 0.1% was in line with market expectations, representing over a year of constant and steady economic expansion. While recent data releases have managed to keep Aussie and Loonie afloat, the relatively uneventful experience for the Kiwi has failed to provide any trigger for the currency to appreciate, which has been bearish since the middle of the month after nearly 3 months of ascent. However, the recent rapid reopening of China is likely to provide fundamental fuel to the Kiwi, and we view the current bearish trend as a temporary retracement before resuming its bullish ascent in the weeks to come.
3. Oil prices extended its rally on the back of a weakening Dollar to $84.49 per barrel by the end of the week. Crude Brent has been on the ascent since the middle of the month after a reversal from nearly 6 months of decline since June this year. Despite the EU’s price cap on Russian oil at $60 per barrel coming in place at the start of this month, oil prices have largely been propped up by optimism over rising demand as China re-opens its economy. Meanwhile, Gold followed an inverse relationship with the Dollar closely and edged marginally higher to end the week at $1797 per ounce as the Greenback edged lower.
