- Traders do not really know what to expect next from Governor Kuroda as the latest increase in stimulus has failed to curb inflation expectations and to weaken the yen
- We believe that there is a decent likelihood of rates going even deeper into negative territory (below -0.1%) and that policymakers will increase their QE asset purchases
- EUR/USD risk is biased to the upside, especially due to the ECB's decision to leave main interest rates unchanged to refrain from extending its QE programme beyond March 2017
- EURUSD: A break in current levels would definitely open the road toward 1.05, however a triggering event would be required
- Precious metals: The overall risk-off environment will most likely prevent a sell-off in those assets, although the situation could change as soon as tomorrow
- In any case we are increasingly bullish on the USDJPY at least until year-end due to growing expectations for a continued Fed rate normalization and on the back of continued policy pressures on the BoJ
USD/JPY has been trading in a very tight range since the beginning of the month with traders reluctant to load on more risk ahead of Wednesday’s Fed and BoJ meetings. Traders do not really know what to expect next from Governor Kuroda as the latest increase in stimulus has failed to curb inflation expectations and to weaken the yen. However, looking at the 1-week 25 delta risk reversal measure (i.e. the difference of implied volatility between calls and puts) on USD/JPY, we notice that the market is wagering that the BoJ will disappoint again as the measure rose to 0.60% from -0.20% last week. After hitting 102.06 in Tokyo, USD/JPY eased to 101.75. The closest support lies at 101.21, while on the upside, a resistance can be found at 104.32.
Yann Quelenn, market analyst: “BoJ - What next? Markets are now on hold in the run-up to both the Fed and BoJ meeting tomorrow and while markets are pricing a no Fed rate hike, the BoJ is almost certainly condemned to surprise markets. At this point of the game, there is no clear solution for the central bank, which currently sees the yen strengthening no matter what it does. As a result, there is a decent likelihood that rates will go even deeper into negative territory (below -0.1%) and that policymakers will increase their QE asset purchases. However, an albeit unlikely surprise from the Fed, could have the potential to totally change the game for the BoJ, which could remain on hold thanks to an unexpected increase in dollar demand. Indeed, tomorrow will be a relatively rare event with two major central banks announcing their rate decisions on the same day. In any event, we are increasingly bullish on the USDJPY, at least until year-end, due to growing expectations for a continued Fed rate normalization and on the back of continued policy pressures on the BoJ.” ---
EUR/USD was also little changed as it traded range bound between 1.1169 and 1.1180. Risk is biased to the upside, especially now that the ECB has decided to leave its main interest rates unchanged and refrained from extending its QE programme beyond March 2017. The single currency is currently trading slightly above its 50dma (1.1166) and 200dma (1.1148). A break of those levels would definitely open the road toward 1.05, however a triggering event would be required.
Precious metals edged slightly higher in Asia with the yellow metal up 0.25% to $1,316.40 an ounce, while silver held ground above $19.20, up 0.30% on the session. Palladium was up 0.25% to 687.25 and platinum rose 0.57% to 1,026.80. The overall risk-off environment will most likely prevent a sell-off in those assets. However, the situation could change as soon as tomorrow with several central banks (Fed, BoJ and RBNZ) releasing their monetary policy decisions.
In the equity market, the uncertainty stemming from tomorrow’s central bank meetings dampened investors’ moods and sent equity returns into the red. In Asia, the Nikkei was down 0.16% but the broader Topix index soared 0.42%. In mainland China, both the Shanghai en Shenzhen Composites were blinking red, down 0.25% and 0.24% respectively. Offshore, Hong Kong’s Hang Seng fell 0.14%, while the Taiex edged up 0.10%. In Europe, equity futures are trading in negative territory as the negative lead from Asia spreads, signalling a lower open.