SYDNEY: The Australian and New Zealand dollars tumbled against a surging yen on Tuesday after the Bank of Japan widened a key trading band for bond yields, a surprise shift that was taken as hawkish by markets.
The Aussie slid 2.9% to a seven-month trough of 89.30 yen, while the kiwi also sank 2.5% to the lowest since mid-November at 84.34 yen.
The yen jumped after the BOJ announced plans to increase its purchases of 10-year bonds but also widened the band for yields to +/-50 basis points, from +/-25 basis points.
Investors took that as a possible first step toward scaling back the bank’s super-easy Yield Curve Control (YCC) policy, slugging bond markets across the globe. “I think the move was certainly unexpected, to say the least,” said Carol Kong, a currency strategist at CBA.
“Dollar/yen just sold off sharply on the back of the YCC revision, and I think that does pave the way for a full abandonment of the YCC programme, and probably a pivot from the ultra-dovish monetary policy stance in the future.”
“If markets interpret today’s revision as a signal that they would increase their policy interest rate later in 2023, that would mean more selling in dollar/yen in the coming weeks.”
With all the action in the yen, the Aussie was left flat at $0.6690, having survived a test of $0.6670/77 support overnight.
Australia, NZ dollars rebound as dollar drags, caution still dominates
It remains well short of last week’s three-month peak of $0.6893, which now stands as formidable resistance. The kiwi dollar edged down to $0.6347, and looked in danger of breaching support at $0.6321.
Bond markets took the BOJ surprise badly, with Australian 10-year yields jumping 25 basis points to 3.77% as investors fretted that one of the last sources of super-cheap liquidity might start drying up.
The prospect of an eventual tightening in Japanese policy also led futures to nudge up the possible peak for Australia’s cash rate by 12 basis points to 3.88%.
Minutes of the Reserve Bank of Australia’s (RBA) December policy meeting out on Tuesday showed its board considered pausing its hikes but decided the case for a quarter-point hike to 3.1% was stronger.
“Based on the analysis in the Minutes, it will set the scene for hikes in both February and March,” said Bill Evans, chief economist at Westpac.
“The May meeting will also be confronted with uncomfortably high inflation for the March quarter and a central bank that is observing tight labour markets and rising wages pressures.”
He expects the RBA to finally go on hold in June as evidence builds that the economy is slowing.
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