China is expected to lower its 2026 growth target amid a global economic slowdown, signalling continued caution in its policy approach. The People’s Bank of China (PBOC) reinforced this stance by setting the yuan’s USD/CNY reference rate at 6.9929, the strongest midpoint since May 2023 and the first time the pair has traded below the key 7-per-dollar level in over half a year. Additionally, the PBOC injected a record 1 trillion yuan of liquidity in January through reverse repos and its Medium-Term Lending Facility, underscoring its easing bias ahead of increased cash demand for Lunar New Year.
In Japan, headline inflation softened in December, with the Consumer Price Index (CPI) excluding fresh food rising 2.4% year-on-year, down from 3.0% in November and matching forecasts. The decline was influenced by fuel subsidies introduced in December and the removal of energy subsidies a year earlier, which impacted year-on-year comparisons. Despite this, underlying inflationary pressures remain firm—core-core CPI advanced 2.9%. Ahead of the Bank of Japan’s (BOJ) policy meeting, USD/JPY made modest gains but showed limited conviction.
The BOJ kept its short-term policy rate steady at 0.75%, as widely anticipated. However, the decision exposed internal divisions, with one board member advocating an immediate hike to 1.0%. The central bank upgraded its inflation and growth forecasts, revealing mounting debate on normalisation timing. Market volatility continues in Japan’s bond market, although stress has eased somewhat. Political risk rose as Prime Minister Sanae Takaichi dissolved the lower house, calling a snap election for 8 February, the shortest campaign in Japan’s history. Investors will be watching BOJ Governor Ueda’s press conference closely for further insights.
In New Zealand, Q4 CPI rose 0.6% quarter-on-quarter, pushing annual inflation up to 3.1%, above the Reserve Bank of New Zealand’s (RBNZ) 1–3% target band. This inflation increase was primarily driven by domestic cost pressures, with non-tradeable inflation at 3.5%. The RBNZ’s sectoral factor model showed inflation at 2.8% year-on-year in Q4, up from 2.7% in Q3 and marking the first rise since early 2023. While inflation remains above the 2% midpoint target, the report failed to extend earlier gains in the New Zealand dollar, which retreated alongside the Australian dollar later in the session.
Australia’s January flash Purchasing Managers’ Index (PMI) suggested a strong start to 2026. The composite index rose to 55.5, boosted by a sharp improvement in services activity and increased new orders. Price pressures moderated, with input and output price indicators easing and selling price inflation remaining subdued—factors that may influence Reserve Bank of Australia policy considerations.
Equity markets in the Asia-Pacific region showed modest gains with Japan’s Nikkei 225 up 0.29%, Hong Kong’s Hang Seng rising 0.33%, Shanghai Composite increasing 0.27%, and Australia’s S&P/ASX 200 edging 0.06% higher.
For forex traders, these developments highlight several key themes. China’s loosening monetary stance and strong yuan fix may weigh on USD/CNH, while Japan’s internal BOJ debate and political uncertainty suggest potential volatility for USD/JPY. In New Zealand and Australia, rising domestic inflation in New Zealand contrasts with easing price pressures in Australia, reinforcing cautious central bank approaches and influencing NZD and AUD movements.
Original Source: Eamonn Sheridan of investinglive.com
