Daily analysis 20.09.2016

The decisions from the Bank of Japan that are to be given tomorrow morning may change the initial situation of currencies before the Federal Reserve meeting. The zloty remains stable before the BoJ and the Fed meetings, as well as after statements from the Polish monetary authorities.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

• 14.30: Data from the American real estate market (estimations in annualized interpretation: permits for building houses: 1.16 million; initiated investments: 1.19 million).

Mysterious BoJ

Tomorrow evening, the market will know the new decisions from the Federal Reserve. However, before we will know the Fed's macroeconomic projections, as well as the FOMC members' expectations regarding the future interest rates, a very interesting meeting of the Bank of Japan (BoJ) awaits us. It may also cause visible changes in the currency market.

The recent signals from the BoJ chairman have suggested that theoretically we may expect a significant monetary easing. During his testimony in Tokyo on September 5th, Haruhiko Kuroda presented arguments that on one hand confirm a positive effect of recent monetary actions, and on the other, suggest that the monetary policy is only limited by legal regulations.

If any other chairman of a leading central bank had said this, it would have been interpreted as preparation for an increase in the quantitative easing program, as well as for further monetary easing. However, the problem is that the BoJ is divided regarding a further stimulation of the economy by the monetary policy.

Let's remember that in January, five BoJ representatives were in favor of a decrease in interest rates below zero, and four representatives were against this move. Even though two of the most hawkish representatives have finished their term of office (as reminded by the Wall Street Journal in an article entitled “Japan's Central Bank Splits Over Easing Program”), the BoJ remains divided in its opinion regarding an increase in the effectiveness of the whole program.

The Wall Street Journal wrote that four out of seven members who support aggressive monetary easing, “are not convinced whether the bonds purchase continues to meet the expectations.” The American periodical also suggested (by referring to an opinion of people who are “familiar with the topic”) that both factions can't come to an agreement regarding the shrinking market of treasury bonds, which are available in the market. The Bank of Japan currently has 20% of issued bonds.

As a result, the market is expecting Kuroda to increase the monetary easing. However, investors are also taking into consideration a dissonance between the BoJ members, as well as the limits regarding further monetary easing and an increase in assets purchase.

Bloomberg economists’ median assumes that the QE will remain at the level of 80 trillion yens per year (approximately 800 billion USD). However, twelve out of forty analysts expect the easing to increase to 90 billion or 100 billion yens. There are similar discrepancies regarding interest rates. The median does not assume a change, but fourteen out of forty economists expect a cut.

Taking into consideration a significant level of uncertainty before the BoJ's decision, the market's reaction may be nervous in the morning. If the basic parameters of the monetary policy remain unchanged, we can expect the yen to start gaining value. In this case, the USD/JPY might test the 100 level.

Moreover, a strengthening of the yen against the dollar may translate to worse global quotations of the American currency. It's possible that the EUR/USD would reach the area of 1.1250 before the Federal Reserve meeting.

On the other hand, if the BoJ surprises with a complex stimulative package (which is unlikely), we may expect the yen to wear-off significantly. This would cause the dollar to be at a relatively positive position before the FOMC meeting.

Zloty is stable before BoJ and Fed

The Polish currency is becoming stable at the area of 4.30 PLN per euro. This seems to be a positive initial level before the decisions from leading central banks. Additionally, we had statements from two MPC members for the Polish Press Agency today. Professor Łon, as well as Professor Osiatyński, suggested unchanged interest rates as the base case scenario. This sustains the market's attitude shown by the FRA contracts.

Returning to foreign events, we only expect the BoJ’s decision to impact the zloty against the dollar. With the lack of a larger monetary easing, the USD/JPY depreciation should force a global evaluation of the dollar before the Federal Reserve meeting. Moreover, if the Fed is relatively dovish, as we expect it to be, it's possible that the USD/PLN will end near 3.80 this week near.