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Yen slips on cautious Bank of Japan signals


Yen retreats after incoming BoJ Governor strikes cautious tone

Dollar grinds higher, pushing gold to lowest levels of 2023

Stock markets close in the green, Nvidia does the heavy lifting

Yen feels the BoJ blues

The yen absorbed some damage on Friday, in the aftermath of the latest inflation report and some remarks by incoming Bank of Japan Governor Kazuo Ueda. Inflation continued to fire up in January, yet the Japanese currency did not manage to capitalize as Ueda downplayed the prospect of any imminent policy moves.

Speaking before lawmakers, the next BoJ chief said inflation has started to peak, warning of softer inflation numbers next month as the government’s energy subsidies to shield households finally kick in. The underlying message was that the central bank should not overreact to supply-driven inflation, even though he left the door open for policy normalization if the inflation trend improves.

His cautious stance left some scars on the yen, which was already under pressure this month as investors recalibrated higher the interest rate trajectory in the US and Europe. Nonetheless, the bulls haven’t thrown in the towel yet. With wage growth finally accelerating, there’s speculation the BoJ might take the next step in its normalization campaign next month, alleviating some of the selling pressure on the yen.

Dollar and gold go their separate ways

The US dollar is about to close higher for a fourth straight week, as incoming data reinforced the notion that the Fed needs to stay tighter for longer to bring inflation under control. Market pricing currently implies US rates will peak at 5.35% this summer, while bets of any serious rate cuts have been pushed out into next year.

This repricing around Fed policy has propelled US yields much higher, boosting the dollar. One-year US government bonds currently pay investors more than 5% to hold, offering a juicy risk-free return that acts like a gravitational force, attracting capital into the United States.

On the other hand, rising yields and a stronger dollar are anathema for gold prices. Since gold does not pay any interest to hold and is typically priced in dollars, it becomes less and less attractive as bond yields edge higher and the dollar appreciates, making it more expensive for foreign investors to purchase the precious metal. Accordingly, bullion has now erased all its gains for the year, crushed under the boot of Fed speculation.

Wall Street stabilizes as Nvidia soars

In the stock market, the major US indices erased some early losses yesterday to close higher, with Nvidia shares (+14%) spearheading the recovery after the chip designer reported earnings. That said, equity markets are still set to close the week with sharp losses.

There are two opposing forces in the markets right now - optimism that economic growth will be resilient versus concerns around interest rates and inflation reaccelerating. These conflicting dynamics have left investors in a tug of war, with some cheering the economy’s strength but others fearing it implies a longer period of high rates that could ultimately inflict more pain.

The problem is that equity valuations are already discounting a strong economy. With the S&P 500 trading at 18 times earnings, the risk-reward for US stocks seems unattractive, especially in an environment where earnings are contracting and yields are racing higher.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-yen-slips-on-cautious-bank-of-japan-signals-175168
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