29 Jan 2024
On 23 January, the BoJ stayed on hold, continuing to expect
core inflation to fall below 2% in FY2025
A day later, the BoC held its policy rate steady, with debates
shifting toward how long to leave the rates unchanged
Both JPY and CAD are likely to move sideways over the
near term, before recovering later this year, in our view
The Bank of Japan’s (BoJ) decision at its first policy meeting in 2024 was in line with market expectations, which the short-term policy rate was left at -0.1% and the yield curve control (YCC) framework was maintained. There were also no major changes in the BoJ’s forecasts. The BoJ stressed that the downgrade of the FY2024 core inflation median forecast (from 2.8% to 2.4%) was due to the change in oil prices, while the forecast for FY2025 was kept mostly unchanged (from 1.7% to 1.8%). On growth, the BoJ remained optimistic, continuing to expect abovepotential growth through the forecast horizon. After the announcement, USDJPY moved largely sideways and is likely to consolidate over the near term.
USD-JPY has been focusing on its rate differentials, with the JPY depreciating about 30% against the USD during the Federal Reserve’s (Fed) rate hike cycle (Chart 1). Our economists expect the BoJ to end its ultra-loose policy this year, with a formal YCC removal in March, followed by an exit from negative interest rate policy in 2Q24. At the same time, the Fed is expected to start its easing cycle this year. With narrower rate differentials in horizon, we believe the JPY will stage a modest recovery against the USD this year (please refer to JPY: A modest recovery in 2024 for details).
Unlike the JPY’s story, much of the story around the CAD is similar to that for the USD, from rates’ perspective. Our economists expect rate cut cycles for both the Bank of Canada (BoC) and the Fed to begin in June. At the 24 January meeting, the BoC left its policy rate unchanged at 5%, while discussions have shifted toward how long the policy rate needs to stay at the current level, indicating that the BoC is walking slowly towards a policy pivot. Lower US bond yields could pull USD-CAD down through both rates and risk-appetite channels. But in case of near-term risk aversion, there is still some buffer for the CAD, as USD-CAD looks elevated relative to risk appetite (using global equities as proxy, Chart 2).
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