Yen reaches 7-month peak as Investors Brace for a hawkish BoJ

Most Asian currencies advanced against the dollar on Monday, cheered largely by the prospect of smaller interest rate hikes by the Federal Reserve. The yen rose 0.4% to 127.32 against the dollar, reaching its highest level since late May ahead of a BOJ policy meeting later this week. Yields on Japanese 10-year bonds rose above the 0.5% upper end set by the BOJ for a second consecutive day. The BOJ is expected to keep interest rates unchanged at ultra-low levels. The Chinese yuan rose 0.1% as the People’s Bank of China kept its medium-term lending rate unchanged. But the central bank also injected more liquidity into markets to shore up economic growth, as the country grapples with its worst yet COVID-19 outbreak.

BOJ's Two-Day Policy Meeting

Investors will be eagerly watching the Bank of Japan's two-day policy meeting that will take place on Wednesday, as speculation is rising that the bank may make further adjustments to its yield curve control policy, which is the first stage of phasing out its massive stimulus. The BOJ surprised the market last month by widening the band around its 10-year bond yield target, a move that investors saw as a precursor to a future rate hike.

With signs of broadening inflationary pressures, there is a growing expectation that the BOJ will eventually normalize its monetary policy. Core consumer prices in Tokyo, which is a leading indicator of nationwide trends, rose at the fastest pace in four decades in December, surpassing the central bank's 2% target for a seventh consecutive month.

National inflation data, which is set to be released on Friday, is also anticipated to show an increase, adding more fuel to the expectation of the BOJ's eventual move towards normalizing monetary policy.

Upcoming economic data

With a holiday-shortened week ahead, the release of the US earnings and retail sales numbers figures will be highly anticipated.

On the US front, retail sales are forecasted to have posted a decline of 0.8% in December, following a 0.6% decrease in November. This would add to recent indications that the Federal Reserve's aggressive rate hikes are cooling the economy. Other notable data releases include producer price inflation, existing home sales and initial jobless claims, as well as regional reports on manufacturing output.

Investors will also be keeping a close eye on the earnings results of major U.S. companies, such as Goldman Sachs, Morgan Stanley, Procter & Gamble, and Netflix, to see if they can beat estimates amidst concerns that higher costs are squeezing profit margins. Year-over-year earnings from S&P 500 companies are expected to have declined 2.2% for the quarter, marking the first U.S. quarterly earnings decline since the third quarter of 2020. The S&P 500 is currently up about 3.8% so far in 2023 after falling more than 19% last year, its biggest annual decline since 2008.

Moreover, the upcoming release of the United States Producer Price Index (PPI) data is set to take place on Wednesday. According to the consensus forecast, a decline in the headline factory gate prices of goods and services (Dec) is expected to be at 6.8% from the previous release of 7.4%. Additionally, the core Producer Price Index might also see a slight decrease to 5.9% from the former release of 6.2% in the same period.

On the Eurozone front, the European Central Bank (ECB) is looking to reach a terminal rate at a more accelerated pace. Recently, ECB's governing council member and French central bank governor Francois Villeroy de Galhau shared that the central bank should aim to reach the terminal rate by the summer. He also emphasized the need for the ECB to be pragmatic about the pace of rate hikes, as they strive to reach their goals.

Additionally, a plethora of economic data from China is expected to paint a downbeat picture, while the World Economic Forum is set to hold its winter meeting in Davos. Investors and economists will be eagerly awaiting the release of important economic data from China, including fourth-quarter and full-year GDP figures, as well as December data on retail sales, investment, and industrial output. While the numbers are expected to be grim, with economists forecasting a drop of 7.8% in retail sales for a fourth consecutive monthly decline and annual growth to increase by only 1.8%, investors are turning their attention to the prospects of a recovery in the world's second-largest economy.

As China continues to rapidly reopen, there is a growing concern about a potential surge in COVID cases as a result of the sharp rise in travel ahead of the Lunar New Year holidays. Despite this, authorities are optimistic about the eventual recovery as they are keeping a close watch on the situation and taking necessary precautions.