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As The BOJ Alludes At a Policy Shift, The Yen Surges, Driving The Dollar Lower
Thursday marked the yen's largest one-day increase in nearly a year, following a surprisingly explicit indication of a policy shift by Japanese monetary authorities. The euro, meanwhile, trimmed losses from earlier in the week.
Ahead of Friday's U.S. non-farm payrolls report, the dollar index declined, primarily due to the yen, which surged by over 2% to its highest level in three months.
Thursday, Bank of Japan (BOJ) Governor Kazuo Ueda stated that once short-term borrowing costs exit negative territory, the central bank has multiple options regarding which interest rates to target.
The markets interpreted this as a possible indication that an impending change was imminent, and as a result, the yen appreciated. The BOJ's implementation of a more stringent monetary policy would stand in opposition to the approaches of other central banks that have signalled the conclusion of their rate hike cycles.
"Last night's remarks essentially fueled wagers on the Bank of Japan's eventual return to positive interest rates," said Karl Schamotta, chief market strategist at Corpay in Toronto.
At 143.465, the dollar was last down 2.62% against the yen, following a brief decline of 3.8% earlier in the session.
By maintaining a policy of ultra-low interest rates, which caused the yen to fall to its lowest level against the dollar in decades and prompted speculation that monetary authorities might intervene to support the currency, the BOJ has been the only central bank to hold firm.
"The market is exceptionally, exceptionally short the yen, and there is substantial consensus that negative interest rates will cease in 2024. "This demonstrates that the market is prepared to seize any opportunity it can in response to that," said Michael Brown, a strategist at TraderX.
The euro last traded at 1.07980, an increase of 0.32% following a significant repricing of interest rate expectations for 2024. However, trading volatility has been contained due to apprehension surrounding Friday's U.S. non-farm payrolls.
The euro gained 0.3% against the Swiss franc to 0.945 francs, surpassing its lowest level of 0.9404 since early 2015, when the Swiss National Bank severed the linkage between the two currencies.
Due to falling inflation, a deceleration in key economies such as Germany, and labour market softness, traders now anticipate that euro zone interest rates will decline to 3% by September, from the current 4%. This is a decrease from the expectation of 3.4% just two weeks ago.
This week, the euro has experienced its lowest level in eight years against the Swiss franc and its lowest level in three months against the pound.
Next Thursday, the European Central Bank (ECB) will conduct its final meeting of 2023.
The dollar index, which fell 3% last month, decreased 0.586% to 103.54 ahead of the primary focus on Friday's payrolls.
"I think we're going to see a slightly softer number relative to expectations, but that this is not going to meaningfully impact expectations for the Fed's policy map," Schamotta commented.
"Where I see the volatility term structure should be probably more elevated is around Wednesday's policy meeting."
It is widely anticipated that the Federal Reserve will maintain current interest rates at its meeting next week. According to the CME's FedWatch tool, futures markets are now pricing in a 60% possibility of a Fed rate cut by March, up from 50% a week ago.
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