Morning Bid: The year of the yen?

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A look at the day ahead in U.S. and global markets from Dhara Ranasinghe, Editor, Financial Markets EMEA, Thomson Reuters (NYSE:TRI).

The holidays are over and it's back to work, so markets are no exception.

And the yen, for starters, is intent on leaving a dismal 2022 behind. It was the worst-performing major currency versus the dollar last year. Yet, on the second trading day of the new year Japan's currency is already scaling seven-months highs.

The yen has jumped almost 7% against the greenback to around 130.70 since the Bank of Japan last month made a surprise tweak to its bond-yield control that allows long-term interest rates to rise more. The move was aimed at easing some of the costs of prolonged monetary stimulus.

A Nikkei report on Saturday that the BOJ was considering raising its inflation forecasts in January to show price growth close to its 2% target this year and next has only fueled speculation that the world's most dovish major central bank may well step back from its ultra-loose policy.

All this leaves the yen - you guessed it - as one of the most favored trades early in 2023. MUFG says that even after the recent rebound, the yen is still "deeply undervalued," which leaves scope for further gains. Pictet has a year-end dollar/yen forecast of 125, implying a further gain in the value of the yen of 4% from current levels.

Japanese authorities stepped into the market in September to prop up the yen for the first time since 1998 and again in October, when it weakened to a 32-year low of 151.94 per dollar. The benefit of hindsight suggests they just needed to hold out a little longer for the yen's recovery.

As U.S. markets reopen after Monday's holiday, focus will likely shift back to the outlook for inflation and monetary policy. The minutes from the Federal Reserve's December meeting are out on Wednesday and the December non-farm payrolls report is due on Friday.

The closely-watched U.S. jobs data alone means the first trading week of 2023 is unlikely to be dull.

There's plenty going on elsewhere too.

China's factory activity shrank at a sharper pace in December, as surging COVID-19 infections disrupted production and weighed on demand after Beijing largely removed anti-virus curbs, a survey showed on Tuesday.

U.S. stock futures point to a strong open for Wall Street shares, European shares were more than 1.5% higher while London's blue-chip rallied over 2% to its highest since last June.

Clearly, yen traders are not alone in wanting to leave a bruising 2022 in the past.

Key developments that may provide direction to U.S. markets later on Tuesday :

- U.S. December final PMI due for release.

- UK manufacturing ends 2022 on a low as orders shrink.

- Brazil markets tumble on Lula's first full day in office.

- Inflation in key German states eases for second month.