Yen soars as markets test BOJ, stocks cheered by inflation retreat

LONDON, Jan 13 (Reuters) – World stocks scaled one-month peaks on Friday thanks to signs of easing inflation, while the yen jumped to seven-month peaks and Japanese bond yields breached a central bank target as investors questioned its commitment to loosening monetary policy.

European shares opened higher and the broad STOXX 600 index (.STOXX) touched its highest since April, while Asian-Pacific shares outside Japan (.MIAPJ0000PUS) hit a new seven-month high and was for a third consecutive week of gains.

US stock futures pointed to a weaker opening for Wall Street, but overall sentiment was upbeat a day after data showed US price pressures continued to ease.

It was Japan that grabbed the market spotlight as the yen rose and benchmark 10-year government bond yields breached the BOJ’s 0.5% ceiling on speculation that its yield curve control policy could be revised, or even abandoned, as early as next Weekly policy meeting.

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A wave of emergency BOJ purchases later pushed yields back, but markets remained buoyant.

The yen strengthened to 128.11 per dollar – its highest since late May. It was last up 0.8% and has rallied 6% in just over three weeks since the BOJ surprised markets by tapering its 10-year government bond (JGB) yield target.

A newspaper report that flagged the possibility of more flexibility doubled bets on a coming shift away from the ultra-easy policy that seeks to pin yields close to zero. The BOJ said it will conduct additional direct bond purchases on Monday, a move that should keep yields down.

“I think it’s too early to give up on the BOJ,” said Nomura’s chief Japan macro strategist Naka Matsuzawa. “It still has ammunition to defend the 0.5% yield cap.”

The BOJ is likely to raise its inflation forecasts next week and discuss whether further steps are needed, sources familiar with the bank’s thinking told Reuters.

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Across Japan, market sentiment was dominated by overnight US December inflation data that more or less landed on consensus expectations. The annual pace of the main consumer price increases slowed to 6.5% in December from 7.1% in November.

Investors responded by lowering expectations for US interest rates. A Federal Reserve hike of 25 basis points instead of 50 next month is now predicted, with futures markets pricing in rate cuts later this year.

Against this backdrop, the MSCI World Stock Index rallied to a one-month high (.MIWD00000PUS) and was set for its biggest weekly jump in two months.

“These latest US (inflation) numbers support the view that the Fed is moving towards 25 bps rate hikes and that is comforting to equity markets,” said Nordea Chief Analyst Jan von Gerich.

The dollar slipped broadly and US Treasuries rallied.

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The yield on the 10-year US Treasury yield fell to 3.418%, its lowest since December 7.

The euro rose to a nine-month high of $1.0868 per and the risk-sensitive Australian dollar climbed to a near five-month high of $0.6994.

News that the British economy unexpectedly posted modest growth in November supported sterling, which rose 0.25% against the dollar.

Oil extended overnight gains – also helped by optimism over China’s reopening – and Brent crude futures were last up 0.4% at $84.33.

Elsewhere, South Korea’s central bank raised its policy interest rate by 25 basis points on Friday, as expected, and economists now believe it may have reached the end of its hiking cycle.

Report by Dhara Ranasinghe; additional reporting by Tom Westbrook in Singapore and Kevin Buckland in Tokyo; Editing by Kim Coghill

Our standards: The Thomson Reuters Trust Principles.


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