Ueda speaks at a BoJ conference in Tokyo. — Bloomberg
SINGAPORE: Investors begin the week desperate for answers to questions about the near-term path of global monetary policy after conflicting signals from key economies upended markets.
Major central banks are set to meet in Tokyo and Washington tomorrow and London on Thursday, with traders struggling to decide if the Bank of Japan (BoJ) will hike interest rates and then when and by how much the Federal Reserve (Fed) and Bank of England (BoE) will cut them.
At stake are recent surges in the yen and pound, as well as the decline of short-term US treasury yields.
Multiple markets ended last week looking jittery due to uncertain policy and economic growth outlooks.
“This week will be more interesting,” said Wong Kok Hoong, the head of institutional equities sales trading at Maybank Securities Pte in Singapore. “And maybe more tiring.”
There’s uncertainty in markets about what the BoJ will do after years in which it rarely touched rates.
Governor Kazuo Ueda is setting a personal record for a lack of public comments before a policy meeting, and the latest economic data has shown inflation accelerating but consumer spending disappointing.
The assumption that further policy tightening is possible sent the yen racing higher last week.
The currency has strengthened by about 5% against the US dollar since July 11, helped in part by suspected intervention as authorities tired of currency weakness.
Underscoring the uncertainty, option trader bets on a rate hike lurched from below 40% to nearly 90% last week before settling somewhere in between.
Economists were equally uncertain, with just 30% forecasting an increase but more than 90% seeing one as a risk, according to the latest Bloomberg survey.
The inter-connectedness of the yen to a host of leveraged investments via carry trades, where the Japanese currency is borrowed and used to buy higher-yielding assets, has shown sharp swings can quickly ripple through global markets.
The currency’s recent climb laid waste to popular currency strategies on everything from the Australian dollar to the Mexican peso.
Inaction from Ueda would leave yen bulls vulnerable, especially if policymakers also disappoint expectations for a sizable cut to bond purchases.
But currency bears are under threat if the Fed does anything tomorrow to accelerate hopes for US rate cuts in the coming months.
“I’m still in the yen bear camp, although there are massive two-way risks going into the big week,” said Charu Chanana, head of foreign exchange strategy at Saxo Capital Markets.
“Expecting the BoJ to hike rates and tweak its bond-buying both in a single meeting seems to be a stretch for a central bank that is inherently dovish by nature.”
Investors will scour the Fed’s policy announcement and chairman Jerome Powell’s remarks tomorrow for anything that supports expectations for a first interest rate reduction in September.
Such a move would align with the view of economists and swaps traders, who are fully pricing in at least two quarter-point cuts this year.
The Fed’s benchmark is now in a range of 5.25% to 5.5%, a peak reached a year ago.
Policymakers have been pointing out a balanced labour market and ebbing inflation for several weeks, an indication they see a growing case for lower borrowing costs in the world’s top economy.
“The upcoming Federal Open Market Committee will be used to lay the groundwork for a September rate cut as the Fed makes the case for moving policy from restrictive territory towards a more neutral footing,” said James Knightley, chief international economist at ING.
Some market watchers, from former New York Fed president William Dudley to Mohamed El-Erian, have even laid out the case for more aggressive easing than what’s currently expected.
In separate Bloomberg Opinion columns, Dudley said the Fed should consider reducing rates this week, and El-Erian warned of a “policy mistake” if the central bank keeps rates too high for too long.
Treasuries are on pace to end July with a three-month winning streak last seen in mid-2021.
Rising convictions surrounding rate cuts helped a Bloomberg index of US government debt touch a two-year high this month.
Two-year yields have declined on the bet that easier monetary policy is coming, leading to a narrowing of the gap with 10-year notes.
US stocks, however, enter the week on somewhat shakier footing, in part because several corporate earnings reports raised doubts over the strength of consumers.
The S&P 500 Index last Wednesday ended its longest stretch without a 2% decline since the start of the global financial crisis in 2007.
A look at the volatility market shows just how important the week, which will also feature a US jobs report and corporate results from Meta Platforms Inc, Microsoft Corp and Apple Inc, among others, is for traders.
A gauge of implied price swings in the S&P 500 in the next week jumped to almost one point above the expected volatility two weeks from now, a signal that the here-and-now uncertainty is higher than that further down the line. — Bloomberg
