The Bank of Japan signals readiness for further rate hikes amid yen weakness and rising inflation risks, with Citi warning of a potential three-hike scenario in 2026 if the yen continues to weaken, suggesting USD/JPY could reach 160.
Markets remained subdued as investors awaited the full resumption of US trading after the holiday. Major FX pairs mostly consolidated, while geopolitical and economic developments attracted attention.
In New Zealand, December’s services PMI rose to 51.5, returning the sector to expansion after 21 months of contraction. This positive surprise, following last week’s manufacturing PMI rebound, reinforced signs of economic stability. The New Zealand dollar gained on the data, while the Australian dollar also saw gains.
Japan’s bond market experienced a significant sell-off, with the 40-year Japanese government bond (JGB) yield hitting 4% — the highest since the bond’s launch in 2007 and the first time in over 30 years any Japanese sovereign yield has reached this level. The sell-off was driven by escalating fiscal concerns, particularly relating to proposed food sales tax cuts. The Centrist Reform Alliance has suggested funding the tax cuts through a new government-linked fund, intensifying investor worries over Japan’s public finances.
In China, the People’s Bank of China (PBOC) kept its one- and five-year loan prime rates steady for the eighth consecutive month at 3.0% and 3.5% respectively, as expected. The policy signals patience on broad easing, favouring targeted measures for now. Shortly after, the PBOC set the USD/CNY reference rate at 7.0006 — the strongest since May 18, 2023 — causing the offshore yuan (USD/CNH) to strengthen.
Additionally, China reportedly met its trade commitments from the previous November’s agreement under the Trump administration by purchasing approximately 12 million tonnes of US soybeans in the past three months, while leaving options open for Brazil as a supply source.
Geopolitics also remained in focus. CNN reported that Donald Trump admitted to UK Prime Minister Keir Starmer that he may have been given “bad information” about European troop deployments to Greenland, opening the door for potential de-escalation. However, broader US-Europe tensions persist.
In the US, the 10-year Treasury yield climbed to a four-month high, reflecting ongoing market caution amid limited new data and a wait-and-see attitude ahead of the full reopening of US markets.
Looking ahead, Donald Trump is scheduled to deliver a special address at the World Economic Forum in Davos on 21 January 2026 from 13:30 to 14:15 GMT. Traders should monitor potential market impacts.
Regional stock markets showed modest declines: Japan’s Nikkei 225 fell 1.14%, sliding for the fourth consecutive session, Hong Kong’s Hang Seng dropped 0.08%, Shanghai Composite edged down 0.12%, and Australia’s S&P/ASX 200 slid 0.66%.
For forex traders, key takeaways include watching the yen’s weakening trend against the dollar, especially around the USD/JPY 160 level flagged by Citi; the PBOC’s steady policy stance with potential easing later in the year; and geopolitical developments that could influence USD sentiment. New Zealand’s improving services data supports potential NZD strength in the short term.
Original Source: Eamonn Sheridan of investinglive.com
