Yen sinks on BoJ comments, dollar eyes CPI revisions

Yen meltdown 

It’s been a dreadful start to the year for the Japanese yen, which has already fallen more than 5% against the dollar, as a combination of worsening economic data and cautious comments from the Bank of Japan have raised doubts about whether a rate increase cycle lies ahead.

Inflation in Tokyo cooled dramatically in January, foreshadowing a similar cooldown on a nationwide level. Similarly, wage growth has stalled and household spending is contracting, both indications of even softer inflationary pressures ahead.

Reflecting the weaker data “pulse”, a senior BoJ official signaled yesterday that even if the central bank exits negative interest rates, it’s unlikely to keep raising them rapidly. That dealt a heavy blow to the yen, pushing the currency down to its lowest levels since November.

Increasingly, it seems that the Bank of Japan won’t embark on a rate-hike cycle, but is instead looking at a one-and-done increase out of negative rates as inflation momentum is evaporating. With the threat of FX intervention off the radar for now, this is a setup that argues for persistent yen weakness.

For the yen to stage a sustainable recovery, the global economy needs to weaken enough for foreign central banks to slash rates with brute force, which might take some time.

Dollar eyes annual inflation revisions

Meanwhile, the US dollar is on track for its fourth consecutive week of advances, riding a wave of resilient US economic indicators and fading expectations of rapid Fed rate cuts. This view was echoed by the Fed’s Barkin yesterday, who stressed the central bank can hold off cutting rates given the strength in the labor market and consumer demand.

All eyes will fall on the annual revisions of US CPI inflation today, a release that Fed Chairman Powell highlighted as something he will be watching closely. Last year’s revisions caught the central bank off guard by revealing inflation was hotter than first estimated, ultimately leading the Fed to adopt its ‘higher for longer’ stance on rates. 

A similar outcome this time could completely close the door for a March rate cut and lower the chances of a cut in May, helping the dollar extend its winning streak. That said, there is no clear indication this will be the case. Hence, there’s an equal risk of a downward revision to inflation readings that triggers the opposite market effects.

Either way, traders will have bigger fish to fry next week, when the CPI report for January is published. That release could have a larger impact in markets since it is more up-to-date, possibly overshadowing today’s revisions.

Oil soars, stocks hover at record heights

Oil prices came back with a vengeance this week, recovering a good chunk of their recent losses as hopes for a truce in the Middle East faded and the US Energy Department projected a sharp slowdown in US oil production growth this year, calming fears of an oversupplied market.

Meanwhile, shares on Wall Street are set to close the week with gains of around 1%, with the S&P 500 piercing above the psychological 5,000 region in pre-market trading on Friday to bring the index to a new record high.

Big tech has done the heavy lifting. Money managers increasingly view these stocks as bulletproof, under the rationale that investments in artificial intelligence will shield tech earnings even if the broader economy slows down, justifying their premium valuations.

Finally, the latest employment stats out of Canada could also attract some attention today.