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USD lower amid dovish Fed, Japan: Holding off further stimulus

As broadly expected the Federal Open Market Committee left short-term interest rates unchanged at between 0.25% and 0.50%. Since there was no press conference, the market had nothing to sink its teeth into apart from the statement. The message was little changed from January, indicating that the Fed is sticking to its dovish position. The phrase: “the global economic and financial developments continue to pose risks” was removed but on the other hand the Fed agreed that domestic economic activity appears to have slowed. All in all, it was roughly in line with the market was expecting and USD crosses remained flat as investors had already priced in the fact that the Fed would most likely hold fire in June. This is now almost certainly the case. EUR/USD fell initially to 1.1272 before bouncing to 1.1362, and finally consolidated at 1.1322.

In Japan, the BoJ announced that the bank needs more time to assess the impact of negative interest rates, thus maintaining its monetary stimulus. Nevertheless, the move came as a surprise as the market was expecting the BoJ to take action in response to the recent JPY’s strength that could delay the BoJ’s inflation target. This decision raised some important questions. Is the BoJ worried about the real effects of ultra-accommodative monetary policy on growth and inflation? Or does the central bank really need more time to fine tune its negative interest rate tool? One thing is clear: the BoJ made it evident that the market will not dictate what the central bank should does. USD/JPY collapsed more than three figures or 3.25% and reached 108.20, the lowest level since April 18th. The closest support lies at 107.63 (low from April 11th), further south another support lies at 105.23 (low from October 2014). In our opinion, the first support should not last long given the rapid building in long JPY positioning.


Yann Quelenn, market analyst: Japan: Holding off further stimulus: “Japanese stock markets were down this morning. Both the Nikkei and Topix index closed largely in negative territory, losing more than 3%. The reason behind this is simple: the perfusion from the Japanese central bank will not be increased. Its asset purchase target will be kept at 80 trillion yen per year and the deposit rate will remain unchanged at 0.1%. The BoJ has decided not to add additional stimulus despite recent weak fundamental data, including very low inflation. Japanese policymakers are now claiming that the 2% CPI target should be achieved by fiscal 2017.

The central bank stated that they need more time to assess the effect of negative interest rates. Only a deeper economic slowdown would push the BoJ to add more stimulus. Currency-wise, the yen is growing stronger against the greenback and less that 109 yen can be exchanged for a one dollar note. There is a decent likelihood that the BoJ’s wait-and-see approach would drive the yen towards 100. A major driver of the USDJPY is also the monetary policy divergence between the Fed and the BoJ but the US path to higher rates only exists, for now at least, in the heads of Fed members. For the time being, we believe that there should not be any further easing until after this summer. For this reason we remain bearish USDJPY in the medium-term horizon. The BoJ will then be condemned to ease further.” ---

On the commodity market, the West Texas Intermediate was unable to break the strong $45 resistance level and stabilised nearby. Similarly, the international gauge, the Brent crude, tumbled on the $47 level, down 0.53%.

On the equity market, the BoJ decision dampened the mood as Japanese equity fell sharply with the Nikkei 225 down 3.61% and the Topix down 3.16%. In mainland China, the Shanghai and Shenzhen Composites slid 0.26% and 0.13% respectively. In Hong Kong, the Hang Seng edged up 0.45%. In Europe, equity futures are blinking red across the board, pointing to a lower open as the negative mood comes in from Asia.

Today traders will be watching CPI from Spain and Germany; retail sales from Sweden; unemployment from Germany; consumer confidence from the Eurozone; initial jobless claims, GDP, personal consumption and core PCE from the US.

Thursday, 28 Apr, 2016 / 9:29

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