Bonda Asia: Expectations of Bank of Japan rate hike rise, USD/JPY under pressure and closes lower

March 31, the chairman of the New York Fed, William, said on Monday that the current monetary policy is “in a good position” to balance inflation and employment. He noted that the war in the Middle East could bring the typical supply shock: on the one hand, it would push up inflation by raising energy and commodity prices, and on the other hand, it would suppress economic growth. This situation “has already begun to show.” Williams further emphasized that as energy prices have risen sharply, the overall inflation rate in the coming months may trend higher, but if the conflict ends and oil prices fall, some of the pressure may ease within the year. He expects that this year the U.S. economic growth rate will be about 2.5%, inflation could rise to 2.75%, and then fall back to around the 2% target next year, while the unemployment rate will increase somewhat.

In addition, earlier this month, the Bank of Japan’s policy board presented a hawkish stance in the summary of opinions from its meeting. One member hinted that, in the face of the Middle East conflict, it may be necessary to adopt more forceful interest-rate hikes than in the recent period. According to the meeting summary of March 18 to 19 released on Monday, one of the nine members said, “If there are no signs that the economic environment has significantly worsened or that small business wage-setting attitudes have changed, the banks will need to raise policy interest rates without hesitation.” The summary signals that the Bank of Japan is concerned about the upside inflation risks triggered by an escalation of the Middle East conflict. Because rising oil prices have exacerbated inflation pressure in this resource-constrained country, traders think the probability of a rate hike at the next decision on April 28 is about 69%.

Today’s key data to watch include: Germany’s February actual retail sales month-on-month; the UK’s fourth-quarter production method GDP annualized final reading; Germany’s March seasonally adjusted unemployment rate; the euro area’s March HICP/CPI year-on-year adjusted rate; Canada’s January seasonally adjusted GDP month-on-month; the U.S. March Chicago PMI; the U.S. March Conference Board consumer confidence index; and the U.S. February JOLTs job openings.

Gold / U.S. Dollar

Gold rose and fluctuated yesterday. The daily chart closed slightly higher. Spot prices are trading around 4580. In addition to the market’s persistent risk-off sentiment that continues to provide support for gold, comments from Federal Reserve officials cooling expectations for further Fed rate hikes have also provided some support for gold. However, the U.S. Dollar Index continues to rise, limiting gold’s rebound space. Today, watch the pressure around 4650; support is around 4500.

U.S. Dollar / Japanese Yen

The U.S. Dollar / Japanese Yen fluctuated lower yesterday, with the daily chart closing slightly down. Spot prices are trading around 159.60. Besides profit-taking that has put some pressure on the exchange rate, concerns that the Bank of Japan will intervene again in the FX market and expectations of further rate hikes by the Bank of Japan have also weighed on the exchange rate. In addition, comments from Federal Reserve officials cooling expectations for further Fed rate hikes have also put some pressure on the exchange rate. Today, watch the pressure around 160.50; support is around 158.50.

U.S. Dollar / Canadian Dollar

The U.S. Dollar / Canadian Dollar fluctuated higher yesterday, reaching a 17-week high. Spot prices are trading around 1.3930. The main reason supporting the exchange rate’s rise is that the U.S. Dollar Index has continued to climb supported by expectations for Fed rate hikes and demand for safe-haven buying. Moreover, weak economic data from Canada in the prior period has also continued to provide support for the exchange rate. However, the ongoing rise in oil prices limits the upside space for the exchange rate. Today, watch the pressure around 1.4000; support is around 1.3850.

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Responsible Editor: Chen Ping