Bank of Japan hikes rates, dips its toes in the water

Bank of Japan Makes Cautious Policy Shift

One swallow does not a summer make, and one interest rate rise by the Bank of Japan (BoJ) does not necessarily mean it's embarking on a hiking cycle. Less taking the plunge — more like dipping its dainty toes in the water.

The BoJ raised interest rates for the first time in 17 years to formally end its negative rates policy. This had been terrifically well telegraphed in advance and the yen sold off on the news — USD/JPY jumping a full big figure to 150. I think that is what you may call a “dovish hike.”

Continued Accommodative Measures

The BoJ raised the short-term interest rate to between 0% to 0.1%, scrapped yield curve control and ended its purchases of exchange-traded funds and REITS... But it pledged to maintain the purchase of long-term government bonds and keep conditions accommodative for a while longer.

The bank “will continue its JGB purchases with broadly the same amount as before” and increase them “in case of a rapid rise in long-term interest rates”. Its goal of stable 2% inflation was “within sight”, but there was still some distance” to go to reach it. The BoJ does not envisage one hike to herald lots more.

Diverse Central Bank Stances

Whilst the yen slackened a bit, the dollar was strong against its peers regardless. Treasury yields continued to firm, with the 10-year above 4.325%. Another central bank was quite dovish — the Reserve Bank of Australia left rates on hold and dialled back some of its tightening bias that the market was discounting anyway.

“The Board is not ruling anything in or out” for the future direction of rates. The AUD to USD rate slipped sharply.

Mixed Market Movements Ahead

European stock markets were broadly flat at the open on Tuesday. Tech stocks bounced back a bit in the US to lead Wall Street higher on Monday ahead of some big AI announcements from chipmaker Nvidia that don’t seem to have moved the stock much at all. Gold continued to track sideways at $2,150. Fed tomorrow is the next big-ticket item.

A Look at the Charts

USD/JPY blazes through 150 to reach a two-week high after the rather dovish language from the BoJ. The risk now is that the BoJ rests on its laurels a bit and thinks it’s done its work. It’s a bit like hoovering – just because you did it last week doesn’t mean the carpet is still clean.

Elsewhere, the dollar was firmly bid against peers, with DXY futures jumping up through the 200-day SMA at around 103.50. A tentative bullish crossover on the MACD to consider.

This has left sterling nursing losses as it dropped below 1.27 to test the 50-day line.

Gold sliding down the channel, looking to see how this breaks.

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