Daily Market Outlook, December 21, 2022

The Bank of Japan's surprise announcement regarding a modification in its yield curve control policy, by widening its 10-year target to a plus or minus 0.5% versus its prior plus or minus 0.25%, has left markets grappling with the implications as the global anchor of rates is finally lifted, market participants believe that this is likely the first salvo in a significant regime shift that will unfold in 2023, this belief is contrary to the BoJ's official stance but nevertheless as is often the case once markets sense weakness or a shift in policy stance they will seek to test the position, with some major hedge funds already openly discussing plans to build positions in the Japanese Yen to take advantage of the potential for future announcements, given the sizeable moves already witnessed in favoured carry trade positions in the likes of AUDJPY and NZDJPY which have already seen reversals of just under 5%.

The BoJ move had initially pressured global risk sentiment with equity markets responding negatively to the last bastion of easy monetary policy seemingly giving way, however, a reversal in sentiment developed during yesterday's European and US sessions as dwindling liquidity and positive comments from FEDEX sparked the fuse for a short covering rally, with the benchmark SP500 snapping a four-day losing streak, this reversal in risk sentiment has carried into Asian trade overnight, with most Asian markets posting positive returns on the day, even the Nikkei managed to stabilise losses showing only marginal decline on the day. European markets are set to open with a positive tone this morning, investors will be hoping for no further 'tape bombs' for the remainder of the week as holiday-thinned trading conditions start to set in and investors hope for a Santa rally, the Scrooge's amongst market participants are starting to opine on what was going on behind the scenes at the BoJ that meant they needed to make this historical policy announcement the week before Christmas?