Yesterday the US Federal Reserve delivered its first FOMC statement since it hiked rates back in mid-December. The Committee noted that “economic growth slowed” since last year and they are “closely monitoring global economic and financial developments…” But the FOMC gave no suggestion that was tuning down its projections for a full 1%-worth of rate hikes for the rest of 2016.
The market response is best described as confused. The major US stock indices enjoyed a brief rally but this was soon followed by a sharp and protracted sell-off. But the dollar fell modestly against the majors which indicated that in FX markets at least, the statement was viewed as dovish. I would back FX over equities to provide the clearest response.
Now we turn to the Bank of Japan (BOJ) which releases its own monetary policy statement in the early hours of tomorrow morning. There has been plenty of speculation that the BOJ is preparing to announce further monetary stimulus. But then there’s always this kind of speculation ahead of BOJ meetings. In fact, the 80 trillion yen ($672 billion) per year stimulus programme has been in place since October 2014. The only thing that has changed is the type of assets purchased.
The Japanese yen has flown higher this year thanks to a massive loss of risk appetite. The USDJPY fell to 116.00 last week although the US dollar has recovered since. Nevertheless, as we can see from the chart below the USDJPY has run into resistance around 118.80/119.00. This marks the 38.2% Fibonacci Retracement of the 18th December/20th January sell-off. So the question is whether the yen will weaken further and the USDJPY break above this resistance, or if it will continue to strengthen and we see a retest of 116.00. Much will depend on the BOJ. Another significant bout of stimulus should weaken the yen and lead to a bounce in global equity markets – particularly the Nikkei. But if policymakers come up short again then we can expect to see a sell-off in risk and the USDJPY.
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