25 Mar 2024
On 19 March, the Bank of Japan (BoJ) conducted a sweeping policy overhaul, ending its negative interest rate policy. However, the lack of clear hawkish forward guidance by the BoJ saw the JPY remain the worst performing G10 currency yearto-date (Chart 1). Looking beyond the near-term reaction, we think the US-Japan yield differential is set to narrow, this, among other factors, should provide support for the JPY (see “JPY: The BoJ ends negative rates” for details).
Meanwhile, central banks across the developed world have been raising borrowing costs since late 2021 (Chart 2) and are generally looking for further evidence of falling inflation before cutting rates. The Bank of Canada, the Bank of England (BoE), the European Central Bank, the Reserve Bank of Australia, Norges Bank, and the Federal Reserve decided to remain on hold in March.
Source: Bloomberg, HSBC (Last updated on 21 March 2024 at 20:30 HKT)
Source: Bloomberg, HSBC
That being said, the Swiss National Bank (SNB) delivered a dovish surprise on 21 March with a 25bp rate cut. The central bank now expects inflation to remain in the target range of below 2% throughout the entire forecast horizon. After the announcement, the CHF extended its year-to-date weakness. Being the first G10 central bank to cut is likely to undermine the currency, as markets may fund carry trades[@carry-trades] out of CHF in a world of low FX volatility, in our view.
Looking ahead, the broad USD is likely to remain determined by the interplay of risk appetite and rates. For now, the USD appears to be able to find a floor in the recent “risk-on” environment (as suggested by the rally in global equities).Relative rates may offer some support to the USD, if other central banks show more dovish momentum. The most recent example was from the BoE’s 21 March decision. The two monetary policy committee (MPC) members who voted for a hike in February decided to join the majority in March to keep the policy rate unchanged at 5.25%. GBP-USD fell below 1.27 after the decision (Bloomberg, 22 March 2024 at 08:10 HKT). With the BoE inching towards easing and cutting at least as much as its peers, the GBP is likely to face downward pressures.
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