Today is FOMC day! The Committee concludes its two-day monetary policy meeting, with market consensus suggesting that a 25bps rate reduction will be delivered. Thus, if this is the case, focus will quickly turn to signals on how policymakers intend to move forward. A few hours after the Fed, during the Asian morning Thursday, the central bank torch will be passed to the BoJ. Following recent reports that Japanese officials are more open to discuss further easing, it would be interesting to see whether they will decide to act now.
Fed Set to Cut Again, Mind the “Dots”
The dollar traded lower or unchanged against the majority of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed against GBP, EUR, NOK and AUD in that order, while it was found virtually unchanged versus CAD, JPY and NZD. The greenback gained slightly only against SEK and CHF.
The spotlight stayed on the energy market for another day, with oil prices tumbling during the US trading, after Saudi Energy Minister Prince Abdulaziz bin Salman said that Saudi’s production will be fully restored by the end of the month, with the supplies to customers already recovered to the levels prior to the attacks. Both Brent and WTI fell 7.04% and 6.6% respectively, with the US equity indices closing their trading in the green. Today, during the Asian session, although Japan’s Nikkei slid 0.18%, China’s Shanghai gained 0.25%.
Having said all that, the gains in the equity world were relatively modest compared to the tumble in oil, and this may have been because investors stayed on guard ahead of today’s FOMC policy decision. This is one of the “bigger” meetings, where apart from the decision, the statement and Chair Powell’s press conference, we will also get updated economic projections, including a new “dot plot”.
Up until Friday, the financial community was convinced that the Committee will cut rates by 25bps at this gathering, but the probability for such an action has declined to 55% by this morning according to the Fed funds futures. On September 6th, Fed Chair Powell repeated what he said at Jackson Hole, namely that the Committee will “act as appropriate” to keep economic expansion on track, comments suggesting that he is indeed leaning towards a cut at this meeting.
In our view, officials are more likely than not to push the cut button, which could result in a small negative reaction in the dollar at the time of the announcement. That said, the aftermath direction will depend on what signals officials will send with regards to their future course of action. In June, the 2019 median dot of their interest-rate projections pointed to no hikes this year. However, 8 out of the 17 members were in favor of lower rates. One member voted for one cut, while the other seven supported the case of two. Since then, the Committee cut rates in July, and as we already noted, it is possible to deliver another one at this meeting. With investors nearly factoring in a third one to come by year end, it would be interesting to see whether the new dots will confirm that view or not.
We believe that the new dots will fail to match market expectations, something that could prove supportive for the dollar, despite officials delivering a quarter-point cut. The latest developments in the US-China trade sequel suggest that the two nations are willing to work out their differences, with the next round of negotiations expected to take place early next month. This, combined with strong consumer spending and wage growth, may be enough reasons for some hawks to argue that the current economic conditions do not justify further easing.
USD/JPY — Technical Outlook
From the end of August, USD/JPY continues to climb higher, while trading above a short-term upside support line taken from the low of August 25 th. As long as the rate remains above that line, we will remain positive, at least in the short run. That said, the pair is currently finding it difficult to overcome the 108.36 barrier. So, until we see a clear break above it, we cannot get comfortable with examining higher areas.
A strong push above the 108.36 barrier would confirm a forthcoming higher high and could invite more buyers into the game. This way, the pair may travel towards the 108.95 hurdle, marked near the highs of July 10 thand 30 th. Initially, the rate might get a hold-up around there, or even correct back down a bit. But as long as it stays above the aforementioned upside line, we will continue aiming higher. This is when we will once again aim for the 108.95 obstacle, a break of which could open the door for a move to the 109.32 level, marked by the peak of August 1 st.
Alternatively, if the pair breaks the above-discussed upside line and falls below the 107.90 hurdle, which is the inside swing low of September 13 th, such a move might temporarily spook the buyers from the field and allow the sellers to take control for a while. The next stop for USD/JPY could be the 107.50 zone, which is Monday’s low. A break of that zone could clear the path for a further slide, which might bring the rate to the 107.19 level, marked by the low September 10 th. Also, this is where the pair could meet its 200 EMA on the 4-hour chart, which may provide additional support.
Will the BoJ Expand its Ultra-loose Policy Tonight?
During the Asian morning Thursday, the central bank torch will be passed to the BoJ. At their latest meeting, Japanese policymakers kept once again their ultra-loose policy unchanged, and maintained the forward guidance that the current extremely low levels of interest rates are likely to stay unchanged “at least through spring 2020”. The Bank also added that it “will not hesitate to take additional easing measures if there is a greater possibility that the momentum toward achieving the price stability target will be lost”.
Concerns over the state of the global economy have grown since then, while all Japanese inflation metrics remained well below the Bank’s objective of 2%. What’s more, recent reports said that the Bank is now more open to discuss the possibility of further easing at this gathering. Thus, all the focus will be on whether officials will decide to act as early as now, and if so, what tools they will use. The Bank has the options of cutting short-term rates further into the negative territory, cutting the 10-year yield target, increasing its asset buying pace, or using a combination of those measures.
According to Japan’s OIS (Overnight Index Swaps), investors see only a 17% chance for a 10bps rate cut. This means they are not convinced that the Bank will indeed act tonight. Thus, further easing at this meeting could come as a surprise to many participants and may result in a weaker yen. On the other hand, if policymakers decide to hold off from acting, focus will quickly turn to hints as to whether some form of action could be delivered in the following months. It would be also interesting to see whether the Bank will change its forward guidance to a more dovish one.
CAD/JPY — Technical Outlook
Although we saw a bit of a slide in CAD/JPY on Friday, this could have been seen as a temporary correction, as the pair continues to move within an uptrend, trading above its short-term tentative upside support line drawn from the low of August 25 th. But recently, the rate had distanced itself quite a bit from that line and our short-term momentum studies are currently running flat. This is why we will take a cautiously-bullish approach for now, and wait for a clear break above last week’s high before examining higher areas.
If the rate accelerates to the upside and breaks the high of last week, at 82.08, this would confirm a forthcoming higher high and the pair might drift a bit higher to test the 82.36 hurdle. That hurdle could become a good resistance, as between July 26 thand 31 stit held the role of a strong support. If the buying doesn’t end there, a break of that hurdle may allow the bulls to push CAD/JPY further north, possibly aiming for the 82.81 level, marked by the high of July 31 st.
On the downside, if the rate falls below Monday’s low, at 81.17, this could send the rate slightly lower, possibly aiming for the 80.85 hurdle. That hurdle is near the 200 EMA of the 4-hour chart, a break of which could trigger a further correction down, potentially leading the pair to the 80.59 support zone, which is the low of September 6 th. Around there, CAD/JPY might test the previously-discussed upside line, which may provide additional support for the rate.
As for the Rest of Today’s Events
During the European morning, we get CPI data for August from the UK. Both the headline and core rates are expected to have declined to +1.8% yoy, from +2.1% and +1.9% respectively. That said, although a slowdown in inflation could weigh slightly on the pound, we expect the currency to continue being mainly driven by developments surrounding the Brexit sequel.
Later in the day, we will get Canada’s inflation numbers for August. The headline rate is forecast to have remained unchanged at +2.0% yoy, while the core one is anticipated to have risen to +2.2% yoy from +2.0%. At their latest meeting, Canadian policymakers kept interest rates unchanged at +1.75% and maintained their neutral stance, reiterating that the current degree of monetary policy remains appropriate. Thus, a decent inflation data set may allow them to stay for a while more among the very few central banks that have not turned their eyes to the cut button yet.
With regards to the energy market, the EIA (Energy Information Administration) weekly report on crude oil inventories is due to be released and expectations point to a 0.535mn barrels gain, after the 2.704mn increase the week before. The case is supported by the API report released yesterday, which showed that crude stockpiles added 0.592mn barrels last week.
As for tonight, apart from the BoJ meeting, we also get New Zealand’s GDP for Q2, which is forecast to have slowed to +0.4% qoq from +0.6%, and Australia’s employment report for August, where the unemployment rate is expected to have ticked up to 5.3% from 5.2%, and the employment change to show a slowdown in job gains, to 10.0k from 41.1k in July.
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Originally published at https://www.jfdbank.com on September 18, 2019.