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It’s no secret that Japan is desperate to weaken the yen and will carry on regardless until something fundamental snaps under the strain.

This is a busy week as far as central banks are concerned with monetary policy meetings from the Bank of Japan (BOJ) early tomorrow morning, the US Federal Reserve on Wednesday and the Bank of England (BoE) the day after. The Fed is expected to keep its powder dry as this is an intermediate meeting. In other words, it isn’t an important quarterly when the FOMC releases its Summary of Economic Projections. Consequently, it isn’t the right forum for a rate change under normal circumstances. The current market expectation is that the Fed will hike rates again in December, although that could change if US economic data starts to weaken. In contrast, it looks fairly likely that the BoE will reverse their 25 basis point rate cut from last August, made in response to the Brexit vote. The UK’s unemployment rate stands at 4.3% - the lowest since 1975 - while Headline CPI for September came in at 3.0% - a full percentage point over the Bank’s 2% inflation target and its highest level in over five years. Yet growth is running below par and the Bank may decide to keep rates unchanged given the uncertainty surrounding the ongoing Brexit negotiations. We’ll look at this in more detail later this week.

The main focus now is on the BOJ meeting which takes place in the early hours of tomorrow morning. But with consumer price inflation running at +0.7% annualised, and Japanese Prime Minister Shinzo Abe’s recent election victory, there’s no chance that the country’s loose monetary policy will be reversed anytime soon. In fact, despite the unprecedentedly high levels of public debt in Japan, it feels as if the BOJ is more likely to add more stimulus than look to wind down its various asset purchase programmes. It’s no secret that Japan is desperate to weaken the yen and will carry on regardless until something fundamental snaps under the strain.

But it’s not just all about the yen. US Treasury yields, speculation over the hawkishness of the Federal Reserve, and who will succeed Janet Yellen as Chair, US tax reform and even the current earnings season all influence the dollar, and in turn the USDJPY.

As we can see from the chart below, the USDJPY is currently running into resistance around 114.00/114.50. This acted as a barrier to dollar gains in May and July this year, as well as now. It’s worth noting that 114.00 marks the 23.6% Fibonacci Retracement of the June-December 2016 rally, so it’s understandable why this is acting as resistance now. We’ll soon see if the BOJ has enough clout (or spare capacity for stimulus) to push the yen lower from here on its own.

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Posted by David Morrison

Tagged: FOMC FedMeeting USDJPY Brexit BankofJapan

Category: PM Bulletin


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