Daily analysis 21.09.2016:
Interesting changes in the policy of Bank of Japan do not have a visible impact on the currency market for the time being. Today’s decision from the Fed is in center of attention. The zloty remains stable, but its moves will be dependent on the FOMC message.
Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.
- 20.00: Announcement and macroeconomic projections from the Federal Reserve (estimations: interest rates unchanged, within the range of 0.25-0.50%).
- 20.30: Press conference after the FOMC meeting, featuring Janet Yellen.
Increasingly interesting information from BoJ
This morning, the Bank of Japan announced many changes in its monetary policy. In the end, they didn’t cause dramatic changes on the USD/JPY. However, they certainly are yet another breakthrough in the central bank’s activity.
The BoJ will continue to purchase treasury bonds, but it has resigned from a particular level of increasing the monetary base, which previously was increasing at the pace of 80 trillion yens per year. This gives more freedom in creating monetary policy, especially that the Japanese monetary authorities have basically decided to manage the treasury bond yield curve.
The BoJ wants the curve to become more steep. It’s worth recalling Kuroda’s testimony from September 5th in Tokyo, of which we wrote about yesterday. It was very much about inflation expectations, which are near the expected target in Japan.
It seems that today’s actions are an attempt of calling out these expectations, which partially are related to profitability of the long-term treasury bonds (this probably concerns mainly bonds with 15-year plus maturity). Therefore, the BoJ will probably purchase less bonds than it currently does. It’s also possible that the government would try to issue more long-term bonds in comparison to the current state. This would cause a decrease in prices of the long-term bonds, as well as a further increase in profitability. This could increase inflation expectations in the future (at least, theoretically).
On the other hand, the BoJ will now try to stimulate the credit by purchasing more short-term bonds, which should keep their profitability low. This should increase income of the financial sector, as well as encourage it to lend money to real economy with keeping low (although probably slightly higher than currently) rates.
Another interesting matter is the BoJ announcement regarding plans of raising inflation above the 2% target. However, this element seems more a psychological trick. The target was impossible to achieve so far, so there are minor chances for exceeding it now. It seems that the BoJ wants to show that its determination is increasing despite failures and that it’s ready for another actions that would accelerate inflation.
Initial wear-off of the yen was probably caused by two elements. Primarily, a plan of taking inflation above the 2% target is a signal that the BoJ will be more aggressive regarding the monetary policy. Secondly, the current monetary policy may increase chances for monetary easing. In general, the BoJ is experimenting with the monetary policy to an increasingly larger degree. Therefore, we will have to wait long for any results. Moreover, situation on the dollar is uncertain, because of the Fed meeting today. Nearness to the 100 level on the USD/JPY increases the risk for both sides. Thus, at noon the yen’s exchange rate returned to the area from before the central bank’s decision.
Very important Fed meeting
Chances for rate hikes in the USA today are very limited. Therefore, the dollar should not wear-off significantly because of interest rate being left unchanged. However, the market will carefully observe the future path of monetary tightening. And it’s not about whether it would actually be realized, but the signal of the Fed’s attitude.
Estimates from particular FOMC members would probably show that they expect one rate hike this year. What’s interesting is how will the path of monetary tightening for 2017 look like. In our opinion, if the Fed suggests a 50 base case points increase for entire next year, it would be a dovish signal. On the other hand, leaving the monetary tightening at the level of 75 base case points would show a relatively hawkish attitude.
It’s also interesting how many Fed representatives will decide to vote differently than the consensus. If only Esther George supports rate hikes, it would be a neutral signal. If it’s also supported by Eric Rosengren or somebody from the Board of Governors, this would be a hawkish element. However, we don’t expect anybody else except for George to vote for rate hikes, despite the recent signals from some of the FOMC representatives.
The press conference will be significant as well. We also don’t expect it to be hawkish. Janet Yellen would probably confirm her dovish attitude, especially if other elements (path of the future interest rates) confirm a significant support for a mild monetary policy from the majority of the Committee.
FOMC is important for zloty as well
If our base case scenario that assumes unchanged interest rates, as well as the dovish message from the FOMC, the zloty may clearly gain value. It’s possible that the EUR/PLN would test the area of 4.28 and the dollar would go to 3.80.
If the FOMC decides to increase interest rates or appears hawkish, the Polish currency may lose value, especially against the dollar. The USD/PLN could reach the value of 3.90.
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