It’s a busy calendar but the first Bank of Japan meeting of 2023 will be a key focus for markets after the shock widening of the yield curve band just before the festive period. This surprised many and came despite potentially weakening the credibility of the bank’s current monetary framework and expectations that inflation will fall below the 2% target in 2023. Speculation is rife that policymakers may increase the yield strategy further. IT oculd also eb the last time that departing Governor Kuroda can crystallise his legacy.

The bind market smells blood and has pushed the 10-year yield to the new upper bound and bought the yen aggressively over the past few weeks. USD/JPY is down over 3% already this year. But the major may need more than the expected new higher inflation forecasts that will be released midweek to keep the bearish momentum going in the near-term. Major support/resistance sits at 128.16 which is long-term Fib level of the 2022 rally.

The dollar has taken a beating to start the new year with a technical breakdown below 103 on the DXY. The strong selling seen in the last quarter of 2022 has carried over with the recent inflation data endorsing the step down to a more traditional 25bp Fed rate rise in February. Price pressures are still elevated and way above the FOMC’s target of 2%. The jobs market remains tight, and the unemployment rate is now back at a multi-decade low. But Fed speakers who have consistently banged the drum about keeping rates high for longer are having a tough time being heard at present.

Notably, the 10-year US Treasury yield, proxy for borrowing costs around the globe, is desperately trying to hold onto the 3.5% level. There looks to be technical support at 3.42%, which the market has touched a few times since December and a decent rebound would help the beleaguered dollar. Next week’s data flow includes activity numbers like retail sales which could highlight softer consumer activity. This kind of data won’t help the greenback which looks prone to more weakness.

We get the usual mid-monthly data dump in the UK which should go some way to deciding if the Bank of England hikes by 25bp or 50bps at its meeting next month. Last week’s better-than-expected GDP figures will probably mean the economy will skirt a recession in the fourth quarter. Going forward, pay growth still looks relatively strong with the jobs market continuing to show little sign of deterioration. Inflation has peaked but is likely to remain in double digits for the next few months. This resilience may give the MPC a bit of room to manoeuvre as it hikes rates next month.

Major risk events of the week

17 January 2023, Tuesday:

-China GDP: Analysts predict that the economy grew 2.9% y/y in the fourth quarter. That takes full year growth to 2% in 2022. The strict zero-Covid policy hurt activity before mid-November. The relaxation in controls has also led to short-term disruption. Other activity data will be mixed. Retail sales look likely to contract deeper on an annual basis. Industrial production could turn to soft contraction in December. It looks like it may be a bumpy road back to normalisation.

– UK Jobs: Consensus sees the jobless rate remaining at 3.7% and wage growth to rise to 6.3% from 6.1%. Most job surveys have deteriorated over the past year, but this may not be enough for the BoE to stand aside on hiking again next month. Redundancies still remain low.

18 January 2023, Wednesday:

-Bank of Japan Meeting: The BoJ is expected to keep policies unchanged after last month’s shock decision to widen the yield curve band. Governor Kuroda’s forward guidance is likely to remain dovish, but inflation forecasts could be raised. The market is pricing in additional normalisation steps from the next governor in April. This has seen JPY outperform all other majors this year. It is up over 6% versus the dollar over the last 30 days.

-UK CPI: Expectations are for the headline to fall to 10.6% from 10.7% and the core also to drop by one-tenth to 6.2%. Petrol prices are expected to drag the former down, with volatile food prices under the spotlight. The BoE’s favoured measure of core services inflation is forecast to peak soon.

-US Retail Sales: Consensus sees a negative print of -0.8%. Analysts expect activity to be dragged down by a big fall in auto sales, while squeezed household incomes from rapid interest rate increases and bad weather may also dampen spending.

19 January 2023, Thursday:

-Australia Jobs: Consensus expects above 60,000 new jobs. This would be a strong figure and unless there was an offsetting rise in the unemployment rate, would mean the RBA will have to raise rates more than 50bps. This should AUD a boost, which has performed well this year so far on the back of the China re-opening.

–ECB Accounts: The transcripts are expected to reveal discussions about the size and timing of future rate hikes as well as QT. Updated staff forecasts lifted inflation projections and showed a shallow recession. The ECB raised rates by a slower pace of 50bps at the December meeting. 

20 January 2023, Friday:

-PBoC Meeting: Consensus expects the bank to remain on hold. A strong pro-growth bias has been signalled by policymakers, with new support measures in place to further stabilise the housing market. Authorities have been encouraging banks to lend out more loans.

– UK Retail Sales: Sales are forecast to drop 4.2% y/y while the monthly print is seen up 0.4%. That is largely due to more costly goods than an increase in volumes. The cost-of-living crisis and high inflation continue to squeeze consumer activity although the fall in petrol prices may help at the margin. Retail company results over the holiday period have tended to be better than expected.