Morning Bid: Rate hike prospect arrests yen decline, for now

A look at the day ahead in European and global markets from Ankur Banerjee

The year that started with a rate hike in Japan might just end with another after the clearest signal yet from Bank of Japan Governor Kazuo Ueda of a possible move soon, setting up the stage for a pivotal month for monetary policy divergence.

Ueda said the BOJ will consider the "pros and cons" of raising interest rates at its next policy meeting in two weeks, helping strengthen the frail yen and pushing Japanese government bond yields to 17-year highs.

It comes just as investors contend with the prospect of an interest rate cut from the U.S. Federal Reserve next week after dovish comments from a series of policymakers. Fed Chair Jerome Powell is due to speak later in the day and his comments will be picked apart by traders to gauge the near-term rates path.

The contrasting moves from the BOJ and the Fed have provided some relief to the yen, which has been loitering near 10-month lows leading to intervention worries. The currency strengthened 0.5% to 155.41 per U.S. dollar on Monday.

Analysts, though, are quick to point out that the yen weakness may not completely end soon as even with policy normalisation in Japan there will still be a wide gap between the U.S. and Japan rates.

While the spread between U.S. and Japanese 10-year bond yields is tightest since April 2022 at 219 basis points, U.S. yields remain significantly higher than Japanese yields. Back in April 2022, though, the yen was trading around 123 to the dollar.

Meanwhile, after a strong end to November, risk aversion has taken hold at the start of the month as investors look ahead to a slew of economic data across the globe, with European manufacturing data taking centre stage.

European futures indicate a lower open in a tepid start to the month after the pan-European STOXX 600 clocked its fifth straight month of gains in November.

Markets will also be hoping to get a clearer picture of who will succeed Powell, whose term is set to end next year, with White House economic adviser Kevin Hassett emerging as a frontrunner, a move that may put the dollar under pressure.

Key developments that could influence markets on Monday:

Economic data: November PMI data for Germany, France, UK and euro zone

(By Ankur Banerjee in Singapore; Editing by Muralikumar Anantharaman)