This morning, the Bank of Japan (BOJ) resumed hiking interest rates, after holding rates steady since its hike in July 2024. The central bank raised its short-term policy rate from 0.25% to 0.50% – a 17-year high – reflecting confidence that wage growth will stabilise consumer inflation around the 2.0% target. The voting among the board was split 8-1, as most of the monetary policy committee believe inflation pressure has become more persistent in the economy. Ahead of the meeting, Governor Kazuo Ueda told markets that the bank would consider raising interest rates, and signalled to markets that the balance of risks was to the topside. The BOJ aims to increase rates to around 1.0% and has raised inflation forecasts. Steady wage growth is expected to drive consumption and, in turn, inflation as firms indicate plans to raise wages during annual negotiations.
There will be continued focus on global monetary policy next week, with the US Federal Reserve and European Central Bank holding monetary policy meetings. The US Fed is likely to hold rates steady after front-loading its monetary policy easing cycle by delivering 100 basis points (1.00 percentage point) worth of cuts in 2024. For the year ahead, markets are pricing in a strong chance that the Fed will deliver two more 25 basis points cuts. The ECB is expected to deliver another 25 basis point (0.25 percentage point) cut next week Thursday. The debate among the Monetary Policy Committee will be centred around how much further rates need to be cut in order to support the Eurozone’s ailing economy. Markets are positioning for 100 basis points of ECB cuts in 2024.
ZAR Markets
The USD-ZAR pair resumed its downtrend yesterday as the ZAR gained on the USD. The pair broke below the 18.4883 support and finished the session at 18.4618. Although local markets have been adding to bets that the South African Reserve Bank will cut the repo rate by 25 basis points next week, a weaker USD has opened the door for the pair to move lower. The softer USD has come about as US President Donald Trump has expressed some reluctance to impose tariffs on Chinese exports, in turn easing trade concerns and fueling a relief rally among emerging markets. Trump’s comments have highlighted the potential power of tariffs, but indicated a preference not to use them. This morning, the USD-ZAR has traded down to 18.4070 at the time of writing, just above the 50-day moving average, which will offer some support.
Global FX Markets
The yen rose over 0.5% to 155.23 per dollar after the Bank of Japan (BOJ) raised interest rates by 25 basis points and revised inflation forecasts upward. While the rate hike was expected, the non-unanimous vote and increased CPI projections highlighted the BOJ’s confidence in achieving its inflation targets. Japan’s core consumer prices rose 3.0% in December, the fastest pace in 16 months. Focus now shifts to BOJ Governor Kazuo Ueda’s briefing for insights on future rate hikes. The Australian and New Zealand dollars surged, hitting five-week highs, following U.S. President Donald Trump’s comments signaling a softer stance on China tariffs. The Aussie rose 0.6% to $0.6324, and the kiwi climbed to $0.57105. Trump’s remarks also strengthened the Chinese yuan, with both onshore and offshore units reaching six-week highs. The U.S. dollar fell broadly, heading for its worst weekly decline in two months, losing 1.5% for the week. Trump’s softer tone on tariffs and his call for the Federal Reserve to cut interest rates contributed to the decline. The euro rose 0.32% to $1.0448, marking its best weekly gain since November 2023, while sterling climbed 0.38% to $1.2399, snapping three weeks of losses. In cryptocurrencies, bitcoin rose 0.8% to $103,963.80, and ether gained 1.56% to $3,299.39. Trump also announced the creation of a cryptocurrency working group to propose new regulations and explore a national cryptocurrency stockpile