Markets around the region were broadly mixed, suggesting traders weren’t willing to shake off lingering jitters after the recent stock rout, let alone turn fully risk-on.
Indeed, not only have some regional markets given up early gains on Wednesday, the risk-off yen has climbed further against the dollar and the dollar index, which measures the greenback against a basket of currencies, has fallen.
The dollar/yen was at 107.06 at 11:51 A.M. SGT, off highs above 107.8 earlier. The dollar index, or DXY, was at 89.440 at 11:42 A.M. SGT, off its earlier high of 89.712, extending its declines since it hit a peak around 90.442 on February 9.
Some analysts were pointing the finger squarely at U.S. fiscal policy after Congress there passed a huge tax-cut bill and followed up with a large spending bill.
Greg Gibbs, analyst at Amplifying Global FX, said in an emailed note on Wednesday that U.S. fiscal policy was “off the rails.”
Gibbs questioned whether the market might getting spooked by the worsening U.S. fiscal outlook.
“Normally, the market would not question the U.S. Treasuries’ capacity to borrow. And it may be heretical to see the U.S. dollar as other than a safe haven,” Gibbs wrote. “However, this U.S. fiscal expansion is especially risky, coming near the end of the business cycle, closer to a steepening demographic fiscal slope, and politics more partisan than ever. It is hard to imagine how Congress could cope with even a minor economic or financial crisis.”
The markets will get their first clues on how the U.S. stimulus is playing out when inflation data are released later in the global day. According to a Reuters poll of analysts, headline consumer price inflation was forecast to have slowed to 1.9 percent annually in January, with core inflation forecast at 1.7 percent. But concerns are rising that the data could outstrip those expectations.
To be sure, the yen may also be reacting to gross domestic product (GDP) data for the October-to-December period, which showed the economy grew 0.5 percent annualised, missing the median estimate from a Reuters poll which had forecast 0.9 percent growth.
While the growth weakness might usually signal the central bank would crank up its stimulus machine, the Bank of Japan may already have hit near its limits as its yield-curve control policy sets a target yield of around 0 percent for 10-year Japan government bonds (JGB) even as it continues to buy large amounts of bonds and exchange-traded funds (ETFs) as part of a quantitative easing program.
As of December, the Bank of Japan already owned more than 46 percent of the JGB market.
There could be one more underlying reason for the yen’s surge.
Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management, said in a note on Tuesday that some of the risk-off rush into the yen could be due to uncertainty over whether BOJ Governor Hiruhiko Kuroda would be reappointed for another term. Kuroda was the architect of the BOJ’s current ultra-easy policy, he noted.
The dollar/yen has already fallen through the initial support level of 107.31, a September 2017 low, that Schlossberg pointed to. He pointed to 107.00 as the next key level.
In the markets, Japan’s Nikkei was down 0.77 percent at 11:39 A.M. SGT, the Hang Seng Index was up 0.86 percent at 11:44 A.M. SGT and the Straits Times Index was essentially flat.