Despite rising bets on multiple BoJ rate hikes, lower US borrowing rates would boost corporate earnings, supporting a bullish medium-term price outlook.
Below, I’ll outline the key market drivers, the medium-term outlook, and the key technical levels traders should watch.
Japanese Government Bond Yields Edge Toward 2.1%
10-year JGB yields climbed to 2.07% in morning trading, edging closer to last week’s 2.1%. The BoJ’s Summary of Opinions from the December Monetary Policy Meeting resonated, weighing on sentiment. Notably, the Nikkei 225 fell 0.28%, extending its losses from the previous day, despite USD/JPY reclaiming 156.
Yen carry trades have remained profitable under current US-Japan rate differentials. However, a higher-than-expected BoJ neutral interest rate and a dovish Fed rate path would likely reverse yen carry trades, drying up short-term liquidity and triggering a sharp sell-off of risk assets.
The BoJ continues to signal a broad neutral interest rate range of between 1% and 2.5%. BoJ Governor Kazuo Ueda recently told parliament that he would announce a neutral interest rate once the range narrowed, leaving uncertainty about the number of rate hikes needed to achieve monetary policy normalization.
Fed Rate Path Key for Medium-Term Bullish Outlook
The risk of yen carry trade unwind is likely to continue influencing risk appetite. However, the US economic outlook and the Fed’s rate path remain key for US equity futures. Lower US borrowing costs would improve corporate profits and equity valuations. Furthermore, lower rates loosen credit conditions, another key bullish ingredient for US stock futures.