Nikkei faces steepest weekly decline since October as yen surges

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8th December 2023 – (Tokyo) The Nikkei and Japanese bond markets witnessed significant upheaval on Friday, with the Nikkei index poised for its most substantial weekly drop since October, bonds facing a sell-off, and the yen surging toward its most considerable weekly gain in five months. These shifts were driven by a rapid exit from positions that bet on Japanese rates remaining low.

While the Nikkei was down by 1.6 per cent, marking a weekly decline of 3.3 per cent, MSCI’s broadest index of Asia-Pacific shares ex Japan rose 0.5 per cent, and Treasuries experienced a slight sell-off. Market movements remained relatively subdued as traders awaited U.S. labor data scheduled for later in the day.

The yen surged by over 2 per cent on Thursday, maintaining robust support on Friday, though remaining below the previous day’s four-month peak of 141.6 per dollar, trading at 143.39.

Bank of Japan Governor Kazuo Ueda’s remarks to parliament on Thursday indicated a challenging year ahead for the central bank, hinting at potential changes in the offing. Notably, traders interpreted these comments as a signal of an impending policy shift. The Bank of Japan is scheduled to set policy rates on 19th December.

Currency strategist Peter Dragicevich from Corpay expressed expectations for a shift in the BOJ’s interest rate regime, noting that the “undervalued” yen is anticipated to strengthen over the coming year, aligning with a broader forecast for the dollar to weaken.

Japan’s bond market has experienced notable pressure, with the 10-year government bond yield rising by almost 15 basis points in two sessions to 0.79 per cent, although still below the BOJ’s soft cap of 1 per cent. The five-year bonds, which faced their most significant single-day selloff in a decade on Thursday, saw yields rise by 10.5 bps and an additional 3.5 bps on Friday to 0.375 per cent. The movement indicates that yields rise when bond prices fall.

Furthermore, reports indicating a steeper decline than initially estimated in Japan’s third-quarter economy, particularly within the household sector, have complicated the central bank’s outlook.

In the United States, jobless claims aligned with expectations, maintaining the market’s focus on broader payrolls figures to gauge signs of a potential slowdown in the job market.

Overnight, the Nasdaq experienced a 1.4 per cent increase, primarily driven by a 5.3 per cent surge for Google parent Alphabet, as the market responded positively to the launch of its latest AI model.

In the currency market, the yen’s remarkable surge has impacted the dollar index, which is eyeing a modest weekly loss at 103.59. The euro has depreciated for the week, trading at $1.0785.

The Australian dollar, influenced by a slowing economy and the perception of a dovish turn by the central bank, is expected to conclude the week with a 1 per cent drop to $0.6607, snapping a three-week winning streak.

Brent crude futures experienced a touch to a five-month low before a slight recovery to $75.02 a barrel during Asia trade, indicating a 5 per cent decline for the week.

Gold, having reached a record high earlier in the week before retracting, is currently priced at $2,032 an ounce. Bitcoin is anticipated to secure an eighth consecutive weekly gain, driven by expectations of a peak in U.S. interest rates and the potential approval of a bitcoin ETF.