As the new calendar year unfolds, the Euro has emerged as a standout performer among the G10 currencies, standing shoulder to shoulder with other major counterparts such as the pound and the US dollar.
In stark contrast, the Japanese Yen has struggled to keep pace, resulting in a notable 3% surge in the EUR/JPY pair, reclaiming ground up to the 160.00-level. The yen’s lacklustre performance was exacerbated by the recent release of labour cash earnings data for November, indicating a softening trend.
However, upon adjusting for sample changes, there is a silver lining as base pay for regular workers has shown a positive increase of 1.9% over the past year. This could potentially be uplifting news for the Bank of Japan (BoJ).
BOJ Governor Ueda’s recent comments, coupled with the prevailing uncertainties surrounding the economic impact of recent earthquakes, have dimmed the prospects of the BoJ confidently exiting negative rates until at least April. This cautious approach aligns with the ongoing assessment of whether the positive trajectory in wage growth can be sustained in the face of the economic challenges posed by seismic events.
While Japan experiences a correction in yields at the start of the year, the euro-zone presents a contrasting scenario. Market participants are recalibrating their expectations regarding the pace and depth of potential rate cuts by the European Central Bank (ECB) in the upcoming months. The implied yields on the March 2024 and December 2024 three-month interest rate futures contracts have surged by approximately 14bps and 33bps, respectively, since late last year.
Despite this upward shift, the euro-zone rate market continues to fully price in anticipation of the first 25bps cut from the ECB by the 11th of April policy meeting. Furthermore, it foresees a cumulative total of 136bps of cuts by the end of the year.
Considering all these, the currency dynamics and central bank policies at the outset of this year paint a complex yet intriguing picture. The euro’s resilience in the face of shifting market sentiments, coupled with the cautious stance of the ECB, presents a dynamic landscape for traders and investors alike. As we navigate through the unfolding developments, the interplay between economic data, central bank decisions, and global events will continue to shape the trajectory of these currencies in the months to come.
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
