Fed And RBNZ Done, Now Focus On BoJ

Includes: FXA, FXB, FXE, FXY, UDN, UUP
by: Dean Popplewell

By Dean Popplewell

Global indices trade mixed as investors continue to digest yesterday’s Federal Open Market Committee (FOMC) policy statement while preparing for tomorrow’s Bank of Japan (BoJ) announcement.

Thus far, Ms. Yellen and company seem to have navigated successfully through some difficult objectives. The Fed had a somewhat tough task of acknowledging global market turmoil since last month's historic rate hike while still remaining data dependent – they seemed to have achieved this in their statement (there was no press conference scheduled).

As expected, The Fed left U.S. overnight rates unchanged

The statement indicated that they continue to monitor global and financial events, while their outlook was viewed as mildly more “cautious.” It’s no surprise that there is a split decision in interpretation from dealers. The ‘doves’ are arguing that the Fed did not go far enough, while the ‘hawks’ suggest that a March rate hike remains on the table, although less than likely. The committee downgraded its assessment of growth and suggested that perhaps the balance of risks could be tilting to the downside.

“The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook.”

Fed’s message is falling on deaf ears when it comes to rate pricing

The removal of “balanced risks” and return of “monitoring global developments” are seen as key to weakened expectations of another March tightening. The fed fund futures are currently only pricing in “one” full hike toward the end of this year, and not the guided four-hikes suggested by the Fed.

Regarding the U.S. economy, it’s not a surprise there were more downgrades than upgrades. The FOMC downgraded growth from “expanding at a moderate pace” in December to noting, “growth slowed late last year.” In addition, household spending and business investment, which were said to have been increasing at a “solid” rate last month, were said to be rising at a “moderate” rate. Net exports were said to have been soft again, the same as in December, but the phrase “inventory investment slowed” was added.

However, it was not all negative. On the plus side, the U.S. “labor market conditions improved further” and “strong” job gains (in December, the Fed went with “ongoing job gains” in December) pointed “to some additional decline” in labor market slack.

On inflation, the Fed did not stray too far from its well-publicized messages. The committee noted that inflation was expected “to remain low in the near term, in part because of the further declines in energy prices” but it would rise to +2% in the medium term as those “transitory” effects faded.

The immediate effect to the U.S. dollar/majors was somewhat volatile, but thus far, it has not made any significant or outstanding leaps now that the Fed has gone from seeing risks as “balanced” to trying to access how global events will eventually impact their original “balanced” outlook.

Reserve Bank of New Zealand (RBNZ) Stands Pat

After the Fed announcement it was the Reserve Bank of New Zealand (RBNZ) turn. It was no surprise that the RBNZ kept rates on hold at +2.5%. The surprise to market stakeholders was the reintroduction of an “easing bias.” Governor Wheeler and company now believe that a return to their target inflation (+2%) is likely to take longer than they have been anticipating. Previously, when the RBNZ loosened monetary conditions the committee signaled that they could achieve its inflation objective at current rates (this allowed the NZD to rally). Yesterday, the RBNZ expressed fresh concerns about China and other emerging markets. The governor reiterated that he would prefer to see further depreciation in exchange rate, and acknowledged the impact of falling fuel prices.

Money-market dealers are now adjusting their kiwi yield curves – some traders are bringing forward their expectation of the next rate cut from June to March, while others seem to be stepping up their easing pricing slightly further out the curve. Also providing some added pressure to the NZD in overnight trading is fonterra cutting this year's milk price forecasts to NZ$4.15/kg from NZ$4.60/kg (with dairy being their largest export, the New Zealand co-op sets global dairy prices), again citing an imbalance between global demand and supply.

Focus Shifts To The Bank of Japan (BoJ)

To many, the Fed was never going to be the main focus for this week, it's Friday’s Bank of Japan (BoJ) rate announcement that is expected to have more of a market impact. Currently, the USD (¥118.85) trades relatively unchanged against yen, as investors remain reluctant to strap on too big of a position ahead of this evening’s (tomorrow’s) decision.

With the ‘dove’ speculator believing that the BoJ will announce further easing at the meet – amid slow inflation and this year’s financial turmoil (Nikkei down -10% in 2016) – the ‘big’ dollar remains well supported on pullbacks.

Historically, PM Abe pays close attention to exchange rates and equity prices as a measure of policy success, it's no wonder that the market has being putting so much emphasis on this meeting. In reality, the BoJ’s hands may be tied as governor Kuroda has limited ammunition. The market will know soon enough!

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