- The Yen resumes its downtrend losses as the effect of the hawkish comments by BoJ Governour Ueda fades.
- Investors' cautiousness ahead of the NFP report is pushing the US Dollar higher across the board.
- Technical indicators show the US Dollar rally losing steam.
The positive impact of Ueda's Hawkish rhetoric after the BoJ’s decision on Thursday has waned and the Yen is losing ground with the US Dollar firming up ahead of the US employment report.
October’s Nonfarm Payrrols change is expected to have declined to 113K in October from 254K. Hurricanes and strikes are likely to have had a relevant impact on last month's data, thus the market will look at the Unemployment rate -seen unchanged at 4.1%- for confirmation.
Beyond that, the US ISM Manufacturing PMI is seen little changed, at 47.6 from 47.2 in September.
On Thursday, BoJ Governour Ueda surprised investors, reiterating the bank's commitment to continue normalizing its monetary policy. These comments were taken as a hint to a further rate hike in December, which provided a fresh boost to the Yen.
From a technical perspective, the broader bullish trend remains intact although the pair might be running out of steam. A break of 151.65 would confirm a deeper correction and shift the focus to 150.60. On the upside, resistances are at 153.00 and 153.85.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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