Stay the course

• The Bank of Japan (BOJ) keeps interest rates steady.
• The currency markets react by sending the Yen lower against a basket of currencies.
• Japan and others are reaffirming their commitment to the Great Reopening and their inflation management strategies. How are the markets reacting?

No going back

The BOJ interest rate policy is unchanged in the face of rampant inflation, sending the Yen sharply lower on Wednesday morning.

The Aussie dollar is buying two more Yen than it did at the start of the day, rocketing to 91.6 AUDJPY.

Source: FXStreet.com

The BOJ is standing firm in the face of the rising tide of inflation. It is taking the opportunity to wash away decades of deflation in an attempt to reinvigorate stagnant sectors of its economy and export market.

The currency market is getting the hint, if on the whole a little reluctantly, and is cooperating, for now, by selling Yen. That should favour stocks and bonds in Australia and beyond in a more “risk-on” posture.

APAC

Singapore, China, Thailand (if requiring a little nudge from APEC partners and industry), and others have recently reaffirmed their commitment to the Great Reopening.

The regional trading partners continue to keep borders open with minimal restrictions on vaccination status and pre-departure clearance.

Warmer weather in Europe and the surging US production and export capacity of LNG are assisting the Asian region by not overheating energy markets as travel routes are opening.

North Asia gas benchmark, JKM, is sharply lower, opening 15% down to start the weak. JKM is trailing the US and European gas benchmarks in their downward spiral.

European markets

Remarkably, gas supply chains in Europe have managed to remain replenished despite Russian gas displacement, which until recently contributed to the majority of Europe’s supply.

The gas markets are aiding policymakers, and the lower power prices will eventually feed through to the consumer. As of now, prices on the European continent remain elevated and continue to drag on the region’s growth.

In another welcome development for Europe, the Australian coal market is now starting to play ball. The price for immediate delivery of Newcastle coal has fallen to $370 / MT from a recent high of $400.

The Newcastle coal forward market is forecasting high prices to be short-lived as it is tied to immediate supply bottlenecks that will likely unravel in the coming months. Newcastle coal prices for delivery in June are trading markedly lower at $270 / MT.

Looking ahead

With coal and gas headed lower and the breakneck speed of capacity growth reorganising enormous supply chains, markets are becoming slightly more optimistic.

Lower heating and power prices for the consumer and industries in Europe and Asia ease the immediate concerns of global monetary policymakers. This should boost sectors that have been overlooked in recent months, like consumer discretionary, industry, travel and tourism.

Despite what it looks like outside in the face of the stiff wind of stubborn inflation, financial markets are doing what they do best and adjusting their valuation for a range of future outcomes.

While most definitely not certain, the probability of a softer exit from the post-pandemic era of hyperinflation is increasing with each passing day.