Japanese yen propelled by BOJ’s policy changes

On Thursday, the yen experienced its most significant one-day rally in almost a year, propelled by a clear hint from Japanese monetary authorities suggesting a potential shift in policy. The dollar index eased ahead of the U.S. non-farm payrolls report on Friday, primarily influenced by the yen’s nearly 2% surge to its strongest point in three months. Bank of Japan (BOJ) Governor Kazuo Ueda’s statement on exploring various options for interest rates signalled a potential policy change, prompting a rally in the yen.

The dollar faced a 1.9% decline against the yen at one point, ultimately settling 1.5% lower at 145.05. Analysts noted that the market, heavily short on the yen, was responsive to any signs of policy shifts, anticipating the possible end of negative rates in 2024.

Expectations are growing that the BOJ might signal a policy wind-down in the upcoming meeting. The euro, meanwhile, hovered around three-week lows, reflecting a recalibration of interest rate expectations for 2024. Traders adjusted expectations for euro zone rates, anticipating a fall to 3.0% by September, down from 4% currently.

Falling inflation, economic slowdowns, and labor market softness contributed to the revised rate expectations. The euro fell to eight-year lows against the Swiss franc and three-month lows against the pound during the week. The European Central Bank (ECB) is set to hold its final meeting of the year, with some suggesting the possibility of a rate cut in 2024 due to quicker-than-expected disinflation.

The euro, down 0.95% for the week, remained flat at $1.0764. Against the Swiss franc, it showed a 0.3% increase at 0.945 francs. The dollar index, down 0.2% at 103.94, focused on Friday’s non-farm payrolls report. Despite recent softening in the U.S. labor market, futures markets indicated a 60% chance of a rate cut by March, up from 50% the previous week.

The Canadian dollar experienced a 0.1% decline against the U.S. currency at 1.3605, influenced by the Bank of Canada’s decision to maintain its key overnight rate at 5% and not rule out another hike, setting it apart from recent central bank trends.