Traders piled into bets on another hawkish pivot from the Bank of Japan following a report that the central bank will review the side effects of its policy as soon as next week.
(Bloomberg) — Traders piled into bets on another hawkish pivot from the Bank of Japan following a report that the central bank will review the side effects of its policy as soon as next week.
The yen surged more than 2% versus the US currency to hit its highest level since June and Japanese bond futures slid after the Yomiuri newspaper said the BOJ will consider adjusting bond purchases or other policy changes to counter turbulence caused by tweaks to its yield-curve control settings last month. One-week implied volatility hit levels last seen early in the Covid pandemic.
The scale of the yen move was helped by downward pressure on the dollar in the wake of US consumer-price inflation data and Federal Reserve commentary that weighed on expectations for how much the US central bank might ultimately increase its policy rate.
Bond futures tumbled even as the BOJ spent a record 2.8 trillion yen ($21.3 billion) on its fixed-rate bond-purchase operations on Thursday to stop cash yields from rising above the upper end of its allowed trading range.
“We now expect the Bank of Japan to widen the yield-curve control range by 50 basis points in March,” BNP Paribas SA strategists including Ryutaro Kono in Tokyo wrote in a research note. There is “risk of an action as early as the January meeting,” they said.
Investors around the world are ramping up bets that the BOJ will be compelled to exit its ultra-dovish settings after it has doggedly clung to the policy even as its major counterparts have tightened. Such a move would reverberate around the globe by triggering off further strength in the yen and potentially luring hundreds of billions in dollars of capital back to Japan.
Strategists expect further policy tweaks from the BOJ in coming months, especially as a new governor is set to take over from Haruhiko Kuroda in April. The BOJ’s decision to double its allowed ceiling for the 10-year yield to 0.5% in December wasn’t the beginning of an exit of monetary easing, but a way to make it more sustainable, Kuroda said last month.
The yen extended gains against the dollar into the US trading session. The dollar-yen pair dropped as much as 2.5% to 129.18, the lowest since June. Japanese 10-year bond futures dropped to the lowest since 2014.
In the US, new data showed inflation continued to slow in December, adding to evidence price pressures have peaked and offering the Fed room to slow the pace of interest-rate hikes next month. Excluding food and energy, the consumer price index rose 0.3% last month and was up 5.7% from a year earlier, according to a Labor Department report Thursday. Official commentary from Federal Reserve official Patrick Harker also helped pressure US front-end rates lower, and in turn the dollar.
Japan’s currency has surged more than 17% from a low set in October amid government intervention, a winding back of bets on Fed interest-rate hikes, and speculation over hawkish BOJ policy shifts.
“Expectations for the BOJ to exit its ultra-accommodative policy will remain a headwind for dollar-yen,” Carol Kong, an economist and currency strategist at Commonwealth Bank of Australia in Sydney, wrote in a note. “Ten-year Japanese government bond futures and swap rates also remain elevated at just under 1%, indicating market expectations for more hawkish policy adjustments.”
The cost of buying option contracts to hedge against moves in the yen has risen. One-week implied volatility in dollar-yen — a gauge of expectations of swings over that time frame — has climbed to the highest level since 2020.
–With assistance from Ryotaro Nakamaru, David Finnerty and Libby Cherry.
(Updates prices throughout.)
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