HONG KONG (Reuters) – The yen and euro were on the backfoot in early trading on Thursday as traders looked for possible catalysts from policy meetings by the Bank of Japan and European Central Bank.
The dollar was steady against the yen at 113.8, not too far from its four year high of 114.69 hit October 20, while the euro slipped 0.1% to $1.1591 heading back towards its 15-month low of $1.1523 also hit earlier this month.
The Australian dollar lost 0.3% to $0.7491 but stayed near its three month top after the central bank declined to buy a government bond at the heart of its stimulus programme, even though yields were well above its target of 0.1%. That sent bond yields higher, a day after a surprise rise in core inflation had sparked rate hike speculation. [L1N2RO015]
The yield target is central to the Reserve Bank of Australia’s case that the 0.1% cash rate will not rise until 2024, so any failure to maintain it fuels market wagers that rates will have to rise much earlier, perhaps even by mid-2022.
“For the first time in what has felt for a long time currencies are really driven by interest rate differentials, as central banks start to telegraph where they are in their normalisation cycles,” said Kim Mundy, senior economist and currency strategist at Commonwealth Bank of Australia.
The Bank of Japan is expected to keep monetary policy settings steady on Thursday, and also project inflation to stay below its 2% target for at least two more years, reinforcing market bets it will lag other central banks in dialling back crisis-mode policies.
“The BoJ is likely to look through the rebound in the CPI caused by rising commodity prices and a weaker yen,” wrote analyst at Bank of America in a note, saying they anticipated it would “maintain the status quo on all key policy settings, as widely expected.”
The European Central Bank also meets Thursday, with investors watching out for ECB’s stance on rising global consumer prices and for any clarity on the outlook for its ultra-easy policy stance.
While key decisions about ECB’s emergency stimulus are set for their December meeting, the recent jack-up in rate-hike expectations has traders looking for any clues from Thursday’s meeting.
“We think ECB President Christine Lagarde will use all her diplomatic skills to moderate the diverging views of hawks and doves within the Governing Council on Thursday” said ING analysts in a note, adding they anticipate a neutral message which “may ultimately defy some of the market’s hawkish expectations”.
At the other end of the spectrum, the Bank of Canada signalled on Wednesday it could hike interest rates as soon as April 2022 and said inflation would stay above target through much of next year, due to higher energy prices and supply bottlenecks.
The dollar fell against the Canadian dollaron the news and was last at $C1.2369.
Sterling was little changed at $1.3725.
In cryptocurrencies, bitcoin was at $58,350 continuing its slide from its record high of $67,016 on October 20. Ether was steady at $3,926.
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