|Last night the Bank of Japan disappointed markets at their eagerly anticipated policy announcement. The BOJ decided to keep its government-bond buying target and interest rate unchanged, opting instead to increase the central bank’s exchange-traded fund purchases. The JPY rallied on the back of this news against every major currency with USDJPY down 200 pips to 103. Somewhat surprisingly the Nikkei which is the biggest beneficiary of the policy change fell nearly 1 percent after the announcement. Markets had hoped the BoJ would pursue other unconventional tools at its policy meeting. These suspicions were heightened by the visit of former US Fed Chairman Ben Bernanke. Investors here were yearning for further stimulus, perhaps in the form of the anticipated ‘helicopter money’ where the bank would fund the government by buying perpetual bonds that never needed to be paid back. However as we’ve seen time and time again the past couple of years, central banks don’t sing off the same hymn sheet as investors.
Reflecting on the past 2 years, you have to start questioning now whether central banks like the BoJ and ECB have reached their limits on implementing effective monetary stimulus tools to combat low inflation. We have seen both banks introduce negative rates and pump money into bond purchases but it has all been to little prevail. The BoE are another central bank where markets are expecting the introduction of easing measures. While these measures will be a watered down version of the above banks, whatever we see next week, markets may find it difficult to get excited given the lack of impact we’ve seen from other economies.
While the news didn’t have the desired effect for the Japanese market, one market that took hope from this was the European. The introduction of ETF purchases from the BoJ has given hope that Mario Draghi may follow suit. This morning we have seen both the DAX and CAC 40 trading in positive territory.
Looking closer to home and remarkably EURUSD has settled back into the well-defined range we have seen for nearly six weeks prior to this week’s Fed meeting. In terms of movements in the currency pair, apart from the initial market reaction, it’s almost as if the FOMC meeting never took place. Previously the range was 1.1000 to 1.1185, needing a breach of either for some directional movement. However, the bottom side support level is now probably a little lower at 1.0955. Overall, we feel that EURUSD may be skewed towards a higher bias after Wednesday’s failure to test lower. Again sterling is coming under some pressure towards the tail end of the week with markets gearing up for next week’s key BoE MPC meeting. Overnight swap rates for sterling are now showing an almost 96% probability of a full 25bps rate cut bringing benchmark rates down to 0.25. Any such action by the central along with any additional QE should see another bout of pound weakness and we would expect to see EURGBP test fresh post Brexit highs at .8640 and cable down below 1.30, testing its 1.2798 low.