Economists at MUFG Bank analyze implications for the FX market from recent G10 central bank updates.

The BoJ moves closer to raising rates

The main takeaway for the FX market from recent G10 central bank updates is that the start of rate cutting cycles appears on course to be relatively synchronized which is contributing to stable FX market conditions at the start of this year. 

We expect the Fed, ECB, BoE, BoC, Riksbank and SNB to have all started cutting rates by Q2. There is a higher risk though that the BoE and BoC could wait a little later to begin cutting rates, and be closer in timing to the laggards of the Norges Bank, RBA and RNBZ. 

One clear exception was the BoJ’s updated policy stance which indicated that they are moving in the opposite direction from other G10 central banks by setting the stage for higher rates and an exit from negative rates for the first time since 2016. The increased risk of the BoJ exiting negative rates as soon as March could prove to be a catalyst for the JPY to rebound further by the end of this quarter.