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JPY slides as BoJ steps up monetary policy framework, FOMC: No move today

- BoJ finally decides to hold its interest rates at -0.1%. Markets now awaiting Fed decision @ 2pm EST/7pm BST

- After introducing negative interest rates and doubling ETF purchases earlier this year, the BoJ decided to introduce an interest rate target for 10-year government bonds

- The yen will likely completely erase last night's losses as the market grows increasingly doubtful that the BoJ can reach the inflation target and drive its own currency

- USD: Gains extended in overnight trading ahead of this afternoon's FOMC mostly due to BoJ easing move rather than a rebound in hawkish expectations concerning the Fed's monetary policy decision

- FOMC: We do not believe that the Fed is willing to disrupt financial markets with any surprises which would signal a deeper recession and burst both the bond and stock bubbles. 

 

Today is a busy day as several central banks unveil their respective monetary policy decisions. The Bank of Japan was the first to kick off early this morning as it announced a new set of measures aimed at lifting inflation towards the 2% target. After introducing negative interest rates and doubling ETF purchases earlier this year, the BoJ decided to introduce an interest rate target for 10-year government bonds. Apart from this, the Japanese central bank held all other tools: negative interest rate at -0.1%, the size of the QE at ¥80tn per year and the purchase of ETF at ¥6tn per year. After some wild swings, which pushed USD/JPY as low as 101.03, the Japanese yen fell as much as 1.20% to 102.79. Looking at the big picture, it seems that the BoJ is having a hard time convincing the market that it still has what it takes to bring inflation closer to the target. Overnight, the yen was down only 0.85% against the greenback and we would not be surprised if the yen completely erases last night’s losses as the market grows increasingly doubtful about the BoJ’s ability to reach the inflation target and drive its own currency. On the downside, a support can be found at 101.03 (low from September 21st), while on the upside, a resistance lies at 104.32 (high from September 2nd).

 

The US dollar extended gains in overnight trading ahead of this afternoon's FOMC meeting as it rose 0.10% against the EUR, 0.12% against the pound, 0.14% against the Swiss franc and 0.18% against the New Zealand dollar. However, these gains were mostly due to the BoJ easing move rather than a rebound in hawkish expectations with respect to this evening's Fed monetary policy decision. The probability of a September rate hike, as measured by the Fed funds futures, has been steady at 22% for the last few days. We do not expect a move at this meeting but we believe Janet Yellen may lay the ground for a December move (just like last year). The dollar index was up 0.15% to 96.16.

 

Yann Quelenn, market analyst: “FOMC: We do not expect a start of the normalization path just yet. The Fed has never risen rates when the probability priced by the market was less than 60%. It currently stands at 20%. We maintain our view that the current economic data, in particular labour market and inflation data are not sufficient to trigger a rate hike. Moreover, US Total Public Debt is increasing at its fastest pace since the beginning of the crisis. As a result, increasing rates would only make it more difficult to reimburse interest without inflation to kill the debt.

 

The apprehension felt by the market is justified. An unlikely move from the Fed would signal a deeper recession and burst both the bond and stocks bubbles. We do not believe that the Fed is willing to disrupt financial markets. A few weeks ago, Rosengren’s hawkish declarations sent the S&P 500 to around its 2-month lows before Brainard, Kashkari and Lockhart stepped in to put out the fire. Indeed, a big issue for the Fed is an overload of communication, which should be more tightly controlled. We believe that in terms of today’s messaging we will likely hear more hawkish comments setting the scene for “the next meeting”. ---

 

In the equity market, Japanese stocks were buoyed, with the broad Topix index surging 2.71% as the Japanese yen slid. The Nikkei index rose 1.91% to 16,807.62. Elsewhere, stocks were trading broadly higher as the era of ultra-lose monetary policy shows no signs of stopping just yet. In Europe, futures were blinking green, indicating a higher open.

 

Today traders will be watching CPI from South Africa; MBA mortgage application, crude oil inventories and FOMC rate decision @2pm EST/7pm BST; RBNZ interest rate decision from the RBNZ.

Wednesday, 21 Sep, 2016 / 8:37

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