Yen gains sharply as Bank of Japan delivers pre-holiday shock

Highlight

* Global markets jolted, yen jumps as BoJ surprises by raising yield cap

* China keeps loan rates unchanged, cut seen in new year

* RàBA considered pausing hikes in December, still see more ahead

Aa peak vs USD, Asian stocks and US futures fall

The yen jumped to a four-month high against the U.S. dollar, on pace for its biggest one-day rise in 24 years, on Tuesday after the Bank of Japan stunned markets with a surprise tweak to its bond yield control program

FX: USD has pushed lower but trades just above 104 on the DXY. The mid-August low is at 104.63 as resistance. US Treasury yields moved higher following the BoJ yield curve control tweak. The 10-year yield rose from 3.58% to 3.71% and above the 100-day SMA at 3.56%.

USD/JPY has plunged along with other JPY crosses. The yen soared on the shock BoJ decision to tweak its YCC. USD/JPY slumped from levels around 137 to sub-133. EUR/USD moved in a narrow range. It is trading just below the pandemic low at 1.0636. GBP/USD gave up the 1.22 handle. The 200-day SMA sits as support at 1.2088. AUD is touching the 100-day SMA at 0.6662. It is trading below the mid-July low at 0.6681.

Gold had a narrow range day. The precious metal is holding just above the 200-day SMA at $1785. Speculators increased bullish gold bets by 50% in the week to December 13 when prices briefly spiked due to the softer dollar and CPI data. But the subsequent setback after last weeks hawkish FOMC was not big enough to shake recent established longs.

Stocks: US equities fell on Monday extending their drop from last week. The S&P 500 closed 0.9% lower. The Nasdaq lost 1.4% and the Dow outperformed, falling only 0.49%. It is the start of the last full trading week of the year. That means liquidity isdwindling as trading desks have squared up positions. We do have some US data coming out over the next few days. That includes Fridays US PCE figures after the final Q3 GDP revisions on Thursday.

Asian stocks traded lower across the board.The Nikkei 225 fell over 2.5% as it reacted to the BoJs move. It has clawed back losses after dropping below 26,500 at one point. US equity futures are in the red. The Nasdaq – yield-sensitive and tech-heavy – has been hit the hardest. European equity futures are lower with the Euro Stoxx 50 future down -1.3%. The cash market closed with a small gain of 0.2%.

Event Takeaway –Big BoJ surprise

As the market was drifting off into a festive slumber, the Bank of Japan has surprised everyone by tweaking its yield curve policy. It widened the band it allows its 10-year government bonds to trade in to +/- 0.5% from +/-0.25%. It also unexpectedly announced an increase in bond purchases in Q1 next year. The bank kept its policy rate unchanged at -0.10%.

This change essentially allows higher interest rates in the current inflationary environment. This is despite the BoJ still officially targeting 0.00% as the outright target. Governor Kuroda has warned markets that this is not a rate hike. He has pushed back strongly against such speculation and said further widening of the yield band is not needed. Investors were potentially thinking this change may come after his term expired in April next year. So, the timing may encourage markets to see this as laying the groundwork for more policy normalisation under a new governor.

Chart of the Day – EUR/JPY hits 200-day SMA

The shock BoJ policy tweak has seen all of the yen pairs move down over 3%. The bank‘s role as a perma-dove has been a key driver of yen weakness this year. If this is the first step of a change in the bank’s bias, this would massively change the outlook for the yen in 2023. The negative reaction in stock markets is also hurting pro-cyclical currencies.

EUR/JPY has been trying to push decisively above previous highs from June and September over the last few months. But today‘s plunge has taken it sharply lower through the 100-day SMA at 142.40. The 200-day SMA is at 140.07. below here is a major Fib level of the year’s rally at 139.28.