The yen(USDJPY) fell to a two-week low on Wednesday amid changes in the BOJ’s board and ahead of Tokyo inflation figures later in the week. Meanwhile, the Aussie dollar jumped after hotter-than-expected inflation raised the odds of more RBA rate hikes. These events made Asian forex markets more mobile midweek after US President Donald Trump’s State of the Union address didn’t offer major policy changes that would affect ForexThe changes at the BOJ come amid a complicated scenario that is making it difficult for markets to price in future monetary policy. The odds of a rate cut as soon as the next meeting in March have fluctuated substantially, generating unusually large volatility in the yen. The upcoming data suggests that volatility could continue.
BOJ Board Changes Surprise Markets
On Wednesday, Japan’s government nominated two academics to join the central bank’s policy board. They are seen as strong advocates of economic stimulus and, for some reason, caught the market by surprise, sending USDJPY over the 156.00 handle. The appointments appear to reflect the Takaichi Administration’s monetary policy preferences, which have long been known to be expansionist.
The nomination comes amid general mixed signalling from the BOJ and government officials. It is well understood that Japanese policymakers do not want The yen(USDJPY) to depreciate too fast. But when it comes to whether or not to hike, which would potentially help achieve that goal, different officials are giving different signals. The government appointed two “reflationists” who advocate for loose monetary policy. Meanwhile, former BOJ officials representing the financial regulatory community warn that sticky inflation could prompt the BOJ to cut sooner.
Prime Minister’s Message and Inflation
On Tuesday, ahead of the BOJ board nominations, Prime Minister Sanae Takaichi held a regular meeting with Governor Kazuo Ueda. In it, she reportedly pressed the governor on monetary policy, expressing concern about communication around rate hikes. The BOJ has been trying to “jawbone” inflation back to target for months, as it is hesitant to raise rates. The report on Takaichi’s concerns contributed to The yen(USDJPY)’s weakness.
It also came after January services CPI was reported unchanged at 2.6%, and above the BOJ’s 2.0% target. The results suggest that inflation is still being pushed higher by wages, and could mean the market reacts to upcoming wage negotiations in March. Friday sees the release of Tokyo February CPI, which is often seen as a bellwether for the country’s inflation rate that comes out later. Annual inflation in Tokyo is expected to ease to 1.8% from 2.0% in January.
More Hikes From RBA After Inflation
Australian inflation is going in the opposite direction, with January’s annualised inflation remaining at 3.8%, rather than falling to 3.7% as expected. The main driver for the increase in consumer costs was housing, which rose 6.8%. The RBA’s preferred measure, the trimmed mean, saw monthly inflation accelerate to 0.3% from 0.2% in December.
Following the data release, former RBA Governor Lowe’s Barrnjoey firm raised its forecast for up to 3 rate hikes this year from 2. The large contribution from housing is seen as a strong push for the RBA to raise rates, as it can directly impact demand. Pending a drop in inflation, the Aussie dollar could remain strong
