Nikkei falls 3.1%, dollar/yen drops 2% after Bank of Japan keeps policy steady

Good morning,

- Best/worst performers in Indices today: HKG33: 0.9%, UK100: 0.0%, SPX500: -0.6%, JPN225: -3.9%.

- S&P 500 futures following Nikkei lower but risk-linked currencies (AUD, NZD) hold up even as EURUSD gains.

-$USDJPY falls more than 2.2% following the #BOJ monetary policy announcement. Nikkei 225 futures decline more than 4.6%

-The Bank of Japan's (BOJ) decision to keep monetary policy steady caused hefty swings in Japanese markets Thursday, with the yen rallying sharply and stocks tumbling after having opened higher. The Nikkei 225 index fell 3.18 percent following the BOJ decision, compared to a 1.41 percent gain before. The dollar/yen pair fell 2.10 percent to 109.11, compared to 111 levels it traded at before the decision, which disappointed a section of the market betting on further stimulus. Australia's ASX 200 was up 0.54 percent, boosted by advances in the energy, materials and financials sub-indexes. Across the Korean Strait, the Kospi fell 14.47 points, or 0.72 percent, at 2,000.93. In Hong Kong, the Hang Seng index traded flat as of 3:15 p.m……BOJ's decision, and the yen's subsequent strength, major Japanese exporters saw their shares tumble…….

………Toyota closed down 3.27 percent, Nissan fell 4.31 percent and Honda was down 4.18 percent. A stronger yen is usually a negative for exporters as it reduces their overseas profits when converted into local currency….Takeda said as an example, every time the dollar weakened by 10 yen, Toyota's operating profits declined by about 13 percent. "That's down from 20 percent ten years ago," he said, adding, "Companies have been making efforts to reduce the currency sensitivity."

- Best/worst performers in majors vs USD today: JPY: 2.9%, NZD: 2.3%, AUD: 0.9%, CHF: 0.4%, EUR: 0.3%, GBP: 0.3%.

-BOJ's Kuroda: True that negative rate policy has some effect on bank profits, but it's very small. No problems in BOJ's bond operations.

- Innes added that BOJ is likely to take a "wait and see approach" to see the full effect of its current interest policy and that it will "likely unleash a massive stimulus package at a later date." "I suspect we could see a bottoming on this recent dollar/yen capitulation in 108.50-109.00 range," he said.

- Share on Twitter Federal Reserve policy makers signaled they’re open to raising interest rates in June, nodding to improvement in global financial markets and downplaying recent weakness in the U.S. economy. The Federal Open Market Committee omitted previous language that “global economic and financial developments continue to pose risks,” instead saying officials will “closely monitor” such developments, according to a statement released Wednesday following a two-day meeting in Washington. The Fed left its benchmark interest rate unchanged. “Labor market conditions have improved further even as growth in economic activity appears to to have slowed,” the FOMC said. “Growth in household spending has moderated, although households’ real income has risen at a solid rate and consumer sentiment remains high.”

Also, “Since the beginning of the year, the housing sector has improved further but business fixed investment and net exports have been soft,” the FOMC said. The committee reiterated that “a range of recent indicators, including strong job gains, points to additional strengthening of the labor market.”

- The Reserve Bank today left the Official Cash Rate unchanged at 2.25 percent. The outlook for global growth has deteriorated over recent months due to weaker growth in China and other emerging markets. Prices for some commodities, including oil, have picked up but remain weak. Monetary conditions are extremely accommodative internationally, with considerable quantitative easing and negative policy rates in some countries. Financial market volatility has eased in recent weeks, but markets continue to watch closely the policy settings of major central banks.

- (UBS) :The Fed flies under the radar in April. The April FOMC statement was broadly in line with expectations. The headline grabbing line was that the FOMC no longer called out the risks posed by "global economic and financial developments", but upon closer inspection, the Fed simply said it will now "closely monitor" those developments. This revision likely reflects the recent improvement in financial conditions, much of which we would attribute to Fed policy…..Consistent with the view that trade-weighted dollar has peaked.

In FX, we have been arguing that the dollar has peaked against DM currencies, the euro in particular, and we remain bullish EUR/USD. Fair value models indicate the euro is still cheap, and with Euro area and US growth continuing to re-synchronize, we forecast a grind higher to our year-end target of 1.16.

Our view that the dollar has peaked does not extend to EM currencies, where our EM strategists remain bearish. Although a dovish Fed can delay EM currency depreciation, they don’t think it can prevent it entirely. In commodity currencies, we remain bullish CAD and NOK, but bearish AUD.

Cautious risk-on tone remains, but stay short EM FX as a hedge to long equities. As we argued recently, as long as global policy remains accommodative, the risk is skewed towards: 1) stronger equity markets; 2) laggards – such as European equities and credits – catching up; 3) steeper curves with higher bond yields, particularly in Europe; 4) a flatter path for the dollar which; 5) helps commodities stabilize; 6) higher gold prices driven by easier policy; combined with 7) a recovery in inflation expectations; and, lastly 8) weaker currencies (vs. USD and EUR) in countries where policy easing is urgently required (Japan, NJA, etc.) or EMs with balance sheet pressures.

- Major news for today: USD Unemployment Claims, USD GDP q/q, NZD Business Confidence, AUD RBA Assist Gov Debelle Speaks.