Market Briefing: Will the BoJ hike rates today?

CalendarMarch 19, 2024
  • Quiet start. US equities a bit higher, bond yields ticked up. USD index slightly firmer. The AUD has tracked in a tight range over the past 24hrs.

  • China data. Some positive signs with the early 2024 activity data generally better than expected. Policy stimulus should see momentum lift over time.

  • RBA & BoJ. No change expected by the RBA. BoJ is more of a focus. First rate hike since 2007 could be delivered. USD/JPY trends impact the USD & AUD.

As is usually the norm it has been a quiet start to the new week for global markets. Although based on the upcoming list of events such as today’s Bank of Japan decision (no set time) and the US Fed meeting later this week (Thurs 5am AEDT) volatility could lift. Overnight, US equities rose (S&P500 +0.8%), while bond yields edged higher (the US 10yr rate nudged up ~2bps to 4.33%). In FX, the USD Index is slightly firmer with EUR (the major USD alternative) slipping back a touch (now ~$1.0870). USD/JPY is treading water up near ~149.20, GBP is down around ~$1.2730, and the AUD has consolidated in a tight ~0.3% range (now ~$0.6560).

Data wise, the China activity batch for the first two months of 2024 was released yesterday. It is still hard to definitively judge given Lunar New Year distortions, but there are tentative signs of improvement coming through with most of the key indicators better than anticipated as policy support, holiday activities and external demand boosted activity. Retail sales are running at 5.5%pa compared to early 2023, while the more commodity intensive industrial side picked up. Industrial production quickened, with growth of 7%pa recorded (vs mkt 5.2%), as did fixed asset investment (4.2%pa vs mkt 3.2%). The upturn in China’s credit impulse and other steps being taken to boost sentiment, and give construction and the property cycle a lift point to things continuing to improve, in our view. Over time we think this should be a tailwind for growth linked assets like commodities, Asian FX, and the AUD. Indeed, although the AUD’s reaction was muted, commodities increased yesterday. WTI crude oil rose 2.3%, iron ore increased ~4%, and copper extended its positive run.

Global focus today will be on the BoJ. Based on the upswing in Japanese inflation and wages the debate is centered on the timing of the first move rather than the direction. Most market analysts surveyed continue to favour a rate hike (which would be the first since 2007) at the late-April meeting, while traders are assigning a near ~50% chance the BoJ moves out of negative interest rates (something that has been in place since 2016) today. Based on market pricing the outcome could produce a binary knee-jerk result (i.e. no change could see USD/JPY (and the broader USD) lift, while a BoJ hike could generate the reverse). That said, we believe that whether the move happens today or next month shouldn’t be of any real consequence over the medium-term. We expect the undervalued JPY to regain ground over coming months as the BoJ embarks on a policy normalisation path at the time other major central banks are beginning to lower rates. Narrower yield differentials, and the spillover impacts on Japanese capital flows should be JPY supportive down the track. And given it is the second most traded currency pair a lower USD/JPY should drag on the USD.

Global event radar: RBA Meeting (Today), BoJ Meeting (Today), UK CPI (Weds), US Fed Meeting & Chair Powell Speaks (Thurs), Eurozone PMIs (Thurs), BoE Meeting (Thurs), US PCE Deflator (29th Mar), China PMIs (31st Mar), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr).

AUD corner

AUD has oscillated in a narrow range near its 200-day moving average (~$0.6560) at the start of the new week. The AUD has swung around in a modest ~0.3% range over the past 24hrs. On our figuring this is around a 1/3 of the average intra-day range the AUD has traded since the late-80’s. There has also been limited movement on the AUD crosses with the major pairs all within +/- 0.1% of where they were this time yesterday.

Locally, the RBA meets today (2:30pm AEDT), and as per the new format Governor Bullock holds a press conference later on (3:30pm AEDT). We and the broader market expect the RBA to hold rates steady at 4.35%. There are no new forecasts at today’s meeting, and since the last meeting/forecasting round 6 weeks ago the various domestic and offshore economic cross currents have netted off. In our opinion this should see the RBA play a straight bat and retain its very mild tightening bias by reiterating “a further increase in interest rates cannot be ruled out”. If realised, this may give the AUD some intra-day support as near-term rate cut assumptions are watered down. This could be compounded later this week if, like we predict, the Australian jobs report comes in better than anticipated.

However, barring a surprise today’s RBA decision should play second fiddle to the outcome of the Bank of Japan meeting (no set time) due to its possible impacts on USD/JPY and the broader USD. As discussed above, markets are assigning a near ~50% chance the BoJ hikes rates today, hence the reaction in the JPY should be binary. A BoJ rate rise, particularly if more moves are hinted at down the line to help quell inflation pressures, should be JPY supportive. Based on the correlation between the pairs (see chart below) and the cascading impact on the USD this could see the AUD rise. By contrast, a no change BoJ outcome would likely generate the opposite result. That said, given the: (i) AUD is trading at a discount (the AUD is ~2 cents below the average ‘fair value’ estimate across our suite of models); (ii) already stretched bearish ‘net short’ AUD positioning (as measured by CFTC futures); (iii) still positive flow support (Australia’s current account surplus is 1.2% of GDP); (iv) improving signs out of China’s economy (see above); and (v) likelihood that no change by the BoJ today is simply a delay until next month, we think any near-term downside in the AUD should be limited.

AUD event radar: RBA Meeting (Today), BoJ Meeting (Today), UK CPI (Weds), US Fed Meeting & Chair Powell Speaks (Thurs), NZ GDP (Thurs), AU Jobs Report (Thurs), Eurozone PMIs (Thurs), BoE Meeting (Thurs), AU CPI (27th Mar), AU Retail Sales (28th Mar), US PCE Deflator (29th Mar), China PMIs (31st Mar), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr).

AUD levels to watch (support / resistance): 0.6510, 0.6530 / 0.6620, 0.6660

FX Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

TUESDAY (19th March)

JPY BoJ Decision (no set time)

AUD RBA Decision (2:30pm)

EUR ECB’s Guindos Speaks (7:30pm)

EUR Germany ZEW Survey (Mar) (9pm)

EUR Labour Costs (Q4) (9pm)

CAD CPI Inflation (Feb) (11:30pm)

USD Housing Starts/Building Permits (Feb) (11:30pm)

WEDNESDAY (20th March)

NZD Consumer Confidence (Q1) (7am)

CNY Loan Prime Rate (1yr/5yr) (12:15pm)

GBP CPI Inflation (Feb) (6pm)

EUR ECB President Lagarde Speaks (7:45pm)

EUR ECB’s Lane Speaks (8:30pm)

EUR ECB’s De Cos Speaks (11pm)

THURSDAY (21st March)

EUR ECB’s Schnabel Speaks (12:45am)

EUR ECB’s Holzmann Speaks (2:30am)

EUR ECB’s Nagel Speaks (3:45am)

CAD BoC Meeting Minutes (4:30am)

USD FOMC Decision (5am)

USD Fed Chair Powell Speaks (5:30am)

NZD GDP (Q4) (8:45am)

AUD Jobs Report (Feb) (11:30am)

EUR France PMIs (Mar P) (7:15pm)

EUR Germany PMIs (Mar P) (7:30pm)

EUR Eurozone PMIs (Mar P) (8pm)

EUR ECB’s Nagel Speaks (8pm)

GBP PMIs (Mar P) (8:30pm)

EUR ECB’s Holzmann Speaks (9pm)

GBP BoE Decision (11pm)

USD Philly Fed Outlook (Mar) (11:30pm)

USD Initial Jobless Claims (11:30pm)

FRIDAY (22nd March)

USD PMIs (Mar P) (12:45am)

CAD BoC’s Gravelle Speaks (12:50am)

USD Leading Index (Feb) (1am)

JPY CPI Inflation (Feb) (10:30am)

AUD RBA Financial Stability Review (11:30am)

GBP Retail Sales (Feb) (6pm)

EUR Germany IFO (Mar) (8pm)

CAD Retail Sales (Jan) (11:30pm)

SATURDAY (23rd March)

EUR ECB’s Nagel Speaks (12am)

USD Fed Chair Powell Speaks (12am)

USD Fed’s Barr Speaks (3am)

EUR ECB’s Lane Speaks (4am)

USD Fed’s Bostic Speaks (7am)

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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