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LONDON/SINGAPORE, Feb 10 (Reuters) – Japanese markets reacted with shock on Friday to news that the government had picked academic Kazuo Ueda to be the next central bank governor, but investors quickly snapped up the yen and sold bonds on expectations he will end years of super-easy monetary policy.

The yen jumped 1% to flirt with 130 per dollar minutes after Reuters reported the government will nominate Kazuo Ueda, a former member of the central bank’s policy board, as the Bank of Japan’s next governor.

While Ueda is considered an expert on monetary policy, most analysts said the appointment of the 71-year-old was totally unexpected — he was not even considered a dark horse candidate — and could signal a move to phase out ultra-low interest rates sooner than initially expected.

Japanese government bonds (JGBs) fell, with 10-year yields hitting the 0.5% top end of policy band that is the crux of incumbent Governor Haruhiko Kuroda’s trademark yield-curve-control policy.

Investors’ interpretations of the appointment and the market moves were mixed as they tried to parse Ueda’s recent commentary.

“He’s been not terribly positive on Abenomics from the start. From about 2016, he was saying that it had basically failed, and the super large monetary easing was causing problems with the bond market, and these sorts of things,” said James Malcolm, UBS’s London-based head of currency strategy.

“I’m surprised that dollar yen is not 129 already. Maybe that’s just a result of people not knowing who these characters are.”

Some analysts thought markets were merely reacting to the fact that Deputy Governor Masayoshi Amamiya, who was until Friday viewed as the lead contender for the top job and had helped frame its ultra-loose policy, hadn’t been picked.

“There is probably a lack of clarity on Ueda’s policy leanings at the moment, but at least it is clear that Amamiya (who is seen as a dove) is out. That removes one of the headwinds for the yen,” said Christopher Wong, currency strategist at OCBC in Singapore.

“The knee-jerk reaction in yen appreciation is more of a reaction to Amamiya being out of the race.”

As per government sources, Ryozo Himino, former head of Japan’s banking watchdog, and BOJ executive Shinichi Uchida are being nominated as deputy governors – implying a major change of guard at the BOJ by the time Kuroda steps down in April.

The nominations need approval by both houses of parliament, which is a near certainty given the ruling coalition’s solid majority.

NEW LOOK, NEW POLICY

For some market participants, the new faces at the BOJ hinted at the need for change in an establishment that has struggled to distance itself from the controversial yield control policy without reputational damage.

Even after a near-decade of quantitative easing and yield control, Japan has not managed to achieve its 2% inflation target. Meanwhile, the BOJ’s increasingly large bond-buying operations have sapped bond markets of liquidity and distorted the yield curve.

“This is a surprise move. I think the new team means that they will redesign the BOJ’s monetary policy, not maintain the current policy,” said Takayuki Miyajima, a senior economist at Sony Financial Group in Tokyo. “That is why the 10-year JGB yield hit 0.5%.”

Still, analysts pointed to some of Ueda’s comments in the past that were seen as inconclusive about his leanings: his urge for caution in raising rates, his views that the Federal Reserve had been late with policy tightening in 2022 and his concern for the impact of inflation on Japan’s giant pension fund.

“The apparent choice for governor now – Ueda – is somewhat of a wild card for the markets,” said Stuart Cole, head macro economist at Equiti Capital.

“So we could yet be in for a volatile ride in the yen if he turns out to be singing from the same hymn sheet as Kuroda.”

(Writing by Vidya Ranganathan, additional reporting by Kevin Buckland and Junko Fujita in Tokyo, Amanda Cooper in London, Bansari Mayur Kamdar in Bangalore; Editing by Kim Coghill)

 

Feb 9 (Reuters) – The dollar index fell on Thursday as the lift from Friday’s hot jobs report and Fed policy comments faded before the Feb. 14 US CPI that will guide market positioning for future rate hikes, which has already reached officials’ median 5-5.25% expectations.

A rise in US jobless claims after 9-month lows the prior week and another Fed speaker endorsing a more measured pace of rate hikes to tame inflation nW1N33R03E produced fleeting session lows in Treasury yields and the dollar. But both recovered with the pending CPI threat and 30-year afternoon auction prepping.

EUR/USD was up 0.25% ahead of the New York close, well off the 1.0791 high by the 10-day moving average and Monday’s 1.0800 peak.

That followed Germany’s belated release of January inflation data that failed to include a core reading and was skewed by re-basing and re-weighting.

Sterling rose 0.42%, but early risk-on gains were trimmed after Treasury yields recovered. Its rebound was capped near 1.2200 and ahead of Friday’s UK GDP report.

USD/JPY recovered most of its earlier losses with help from rebounding Treasury yields after earlier making new lows for the week but failing to attract much follow-through selling.

Yen traders are also focused on next week’s nomination of new BoJ leadership amid persistently rising inflation that the Japanese central bank’s embattled JGB yield cap policy looks ill-equipped to handle.

The trade-offs between tighter policy that supports the yen and reduces imported inflation versus the negative impact on Japan’s exporters, value of foreign sales and investments, as well as the government’s enormous debt-to-GDP ratio, argue against a rapid removal of ultra-easy policies.

The biggest dollar losses were against Swedish crown after the Riksbank raised rates 50bp, explicitly meant to underpin the crown, which gained 2.5% against the dollar.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

 

BENGALURU, Feb 7 (Reuters) – The dollar’s recent comeback may not be indicative of a new broad trend, with FX strategists in a Reuters poll split on the greenback’s path in the next few months, suggesting volatility will dominate currency markets in the short run.

Having fallen about 1.5% in January the dollar clawed back all those losses after an eye-popping US non-farm payrolls number on Friday raised doubts over market expectations the Federal Reserve would loosen monetary policy by end 2023.

Citing those unexpectedly strong jobs gains in January, Atlanta Federal Reserve Bank President Raphael Bostic said on Monday the central bank may need to lift borrowing costs higher than previously anticipated.

Interest rate futures pricing show markets are expecting the fed funds rate to peak just above 5.1% by July, roughly where the Fed sees it, compared with expectations of less than 5% prior to Friday’s jobs report.

That repricing is likely to keep volatility elevated in the near term. The J.P. Morgan VXY G7 Index is already above its 10-year average.

“I think the market’s going to be quite fickle and this whole process of the market’s view coming in line with the Fed’s view won’t be overnight…this is a process, and I do think we’re going to see some volatility,” said Jane Foley, head of FX strategy at Rabobank.

There was no clear majority among analysts who answered an additional question on what the greater risk was to the dollar over the coming three months.

While 12 said it was that the greenback declines at a faster speed, 11 said it would decline at a slower speed. The remaining 19 said the dollar rising was the greater risk.

“In the shorter run there’s some chance for the dollar to gain a bit…especially if the data stays relatively good and the Fed gets in at least two more hikes and there is some upside risk to the terminal rate for the Fed,” said Brian Rose, senior economist at UBS Global Wealth Management.

However, the consensus view in the Feb. 2-7 poll of 66 forex strategists predicted the dollar to weaken over the next 12 months.

The euro up 1.5% against the dollar last month, its best start to the year since 2018, has since given up all of those gains.

However, the common currency was forecast to strengthen from its current level to trade around USD 1.08, USD 1.09 and USD 1.11 in the next three, six and 12 months. That year-end prediction is around 3.5% higher from the USD 1.07 it was trading on Tuesday.

The Japanese yen down over 12% last year, its worst performance in nine years, was expected to change hands around 124/dollar in a year. If realised, that would be a gain of around 6.5% against the dollar.

Median forecasts also showed the British pound strengthening from USD 1.20 to USD 1.24 in the next 12 months.

But much still depends on the outlook for the dollar.

“We continue to expect the dollar to weaken – a number of factors sort of underpin that view. We do think the US economy is likely to continue to slow but the most recent data we got on Friday certainly push us back against that hypothesis,” said Brian Daingerfield, head of G10 currency strategy at NatWest Markets.

“We also think inflation pressure is likely to continue to moderate as we go through the year and so we’re seeing less upside risk to the fed funds rate or the path of the fed funds rate as an upside risk to the dollar.”

(Reporting by Hari Kishan; Analysis by Sarupya Ganguly; Polling by Prerana Bhat and Susobhan Sarkar; Editing by Bernadette Baum)