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Market News Central bank policies continue to diverge, and the yen’s rally may not continue

Central bank policies continue to diverge, and the yen’s rally may not continue

On Tuesday (November 2) in the European market in early trading, as the yield of US Treasury bonds fell continuously, the dollar fell more than 3% against the yen within the day, testing the low near 113.60. Although the Bank of Japan’s optimistic attitude towards the economic outlook constitutes some support for the yen, it is unlikely that the yen’s gains will continue under the pressure of the widening of the central bank’s policy differences and political uncertainty. GMT+8 On Thursday, the Federal Reserve's monetary policy statement may set the tone for the market in the coming months.

2021-11-02
12021
On Tuesday (November 2) in the European market in early trading, as the yield of US Treasury bonds fell continuously, the dollar fell more than 3% against the yen within the day, testing the low near 113.60. Although the Bank of Japan’s optimistic attitude towards the economic outlook constitutes some support for the yen, it is unlikely that the yen’s gains will continue under the pressure of the widening of the central bank’s policy differences and political uncertainty. GMT+8 On Thursday, the Federal Reserve's monetary policy statement may set the tone for the market in the coming months.



The code reduction is expected to land, and expectations for the Fed to raise interest rates have heated up


At 2:00 AM on Thursday, GMT+8, the Federal Reserve will announce its interest rate decision. At the same time, the market expects that the Federal Reserve will approve a plan to reduce its monthly bond purchase plan of US$120 billion, which was implemented to help the economy during the epidemic. Investors will also pay attention to the comments on interest rates and the extent of the recent surge in inflation.

Investors continued to raise their expectations this week, believing that continued high inflation will force the Fed to raise interest rates earlier and faster than policymakers expected. FedWatch data from the CME Group shows that the current federal funds futures contract shows that the market expects the Fed to raise interest rates three times next year, each by 25 basis points, compared to only two later last week.

Goldman Sachs has advanced expectations for the first rate hike in the United States after the epidemic by one year to July 2022, because the investment bank expects inflation to remain high. Goldman Sachs also expects to raise interest rates for the second time in November 2022, and then raise interest rates twice a year thereafter.

Goldman Sachs chief economist Jan Hatzius wrote in a client report: "We now expect that when the debt reduction program ends, core personal consumption expenditure inflation will remain above 3% and core CPI inflation will remain above 4%."

The difference in the policy outlook of the two central banks continues to widen, and the Liberal Democratic Party’s election victory suppresses the yen


Last Thursday, as expected, the Bank of Japan (BOJ) maintained its short-term interest rate target at -0.1% and 10-year bond yields at around 0%.

In the latest quarterly forecast, the Bank of Japan lowered its consumer inflation forecast for the fiscal year ending in March 2022 from 0.6% to 0%. Due to the impact of weak consumption and supply disruptions caused by the epidemic on factory output, the IMF also sharply lowered Japan's economic growth forecast for this year. These forecasts highlight the policy gap between Japan and other economies.

On Monday, after the Liberal Democratic Party led by Prime Minister Fumio Kishida unexpectedly maintained a majority in the House of Representatives, the Nikkei index rose 2.3% to a one-month high. Polls show that Fumio Kishida's Liberal Democratic Party, unexpectedly, maintained a majority in the House of Representatives elections on Sunday, consolidating his position in a divided party and enabling him to increase stimulus.

Shinichiro Kadota, a senior foreign exchange strategist at Barclays in Tokyo, said: “Political uncertainty plays a role and puts pressure on the yen, but the Fed will still affect the U.S. dollar against the yen in the future.”

If the Fed hints at raising interest rates, the U.S. against Japan is expected to look at 115.5


The minutes of the Bank of Japan meeting released on Tuesday showed that committee members agreed that as the impact of the epidemic subsides, the Japanese economy is expected to improve. The Bank of Japan’s optimism has dispelled concerns that rising import costs may undermine the economic recovery, supporting the yen.

However, the Fed's hawkishness relative to the Bank of Japan puts the dollar against the yen in a favorable position. The yen’s rally remains at risk. If the Fed hints at three interest rate hikes in 2022, then we may see the USD/JPY rise to 115.50 or higher soon.


(Daily chart of USD/JPY)

GMT+8 At 15:20 on November 2, the USD/JPY traded at 113.64/66.
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