Bets on rising consumer prices in Japan have depressed inflation-adjusted bond yields, thereby weakening the bond’s support for the yen.
An important indicator for gauging the market’s expectations of future price increases – the 10-year breakeven inflation rate – soared this week to its highest level since records began in 2004.
Inflation rate rose to around 1.74% earlier on Monday and has remained above 1.7% since then, despite strong hints from Fed governor Kikuo Iwata that the central bank might tighten monetary policy at a meeting later this month to curb inflation.
Although Ueda’s increase in the policy interest rate will push up nominal bond yields, which is beneficial to the yen, if consumer prices continue to rise too fast and weaken the purchasing power of the yen, then this effect will be mitigated.
“Due to the expected rise in inflation, the Bank of Japan’s interest rate hike will not lead to an increase in real interest rates and thus will not be a factor supporting the yen,” said Seiji Noda, chief foreign exchange and foreign bond strategist at SMBC Nikko Securities.
The 10-year breakeven inflation rate measures the difference between the yield on nominal government bonds and the rate on inflation-linked bonds of the same maturity. Subtracting the breakeven inflation rate from the 10-year bond yield results in a real yield of approximately 0.2%.
Ueda said that with the actual interest rate being low, monetary policy will remain accommodative even after the interest rate hike.
Technical analysis:
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Gold: Yesterday, the buy stop in the blue area we alerted through the plugin had a brief effect, but it was still 2 dollars short of the 1:1 profit-loss ratio. The price has now returned to around 4200, waiting for the liquidity to be cleared. Therefore, we suggest keeping an eye on the long signal capture after the low sweep in the 4180-4190 area. The price needs to recover above 4130 to open up more space. For detailed positions, please consult the plugin.
(Gold 15-minute chart)
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Nasdaq: Yesterday, the buy stop in the blue area we alerted through the plugin didn’t get triggered. Today, we’ll keep an eye on this area. If there’s a breakout signal, we can still participate. Additionally, currently, the liquidity is gathering around the 25,400/25,450 area. After a dip today, we should still try for a rebound opportunity. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: The buy stop in the blue area we alerted yesterday through the plugin performed extremely well, achieving a profit-to-loss ratio of around 4 times. For today’s trading, we will focus on the convergence and breakthrough of the near end. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Key economic data and events to focus on today:
18:00 Eurozone retail sales for October
21:30 U.S. Seasonally Adjusted Initial Jobless Claims (in thousands) (to 11/29)
