Traders punish BoJ for not taking action; Fed less concerned on global risks

“Kuroda, what are you thinking of?” This is the question most traders are arguing at the moment after BoJ stood pat on monetary policy, leaving three key monetary policy tools unchanged. Markets were prepared for another round of easing after reports on Friday said the central bank is considering expanding its negative rate policy to bank loans, in a similar attempt to ECB’s TLTRO to stimulate banks’ lending to the economy. Unfortunately, they were disappointed.

The Yen reacted exactly the opposite way than it did last Friday, rallying by more than 2% against the dollar, its biggest one day gain since August 24, and dragged the Nikkie and Topix indices by more than 3%, ignoring the BoJ's 300 billion Yen zero-rate loan program offered to banks in earthquake-hit areas. Prior to the BoJ meeting, data showed Japan's consumer prices fell by 0.3% year on year last month, the biggest drop since April 2013. Pressure on prices led the BoJ to postpone the time frame required to reach a 2% inflation target by another 6 months, and downgraded their projections on growth slightly to 1.2% from 1.3%.

The economy, which already looks to be in technical recession mode if data due to be releasedonMay 17 show Q1 GDP shrank further, is betting on further easing from the fiscal side. Prime Minister Shinzo Abe is likely to announce a supplementary spending package to spur growth, along with postponing the sales-tax increase scheduled for April next year. However, if economic data continuesto point south, the BoJ will be obliged to take action when it reviews economic outlook in its July 28-29 meeting. Thus, I continue to have abullish outlook on the USDJPY in the long run, and any approach toward 105 will be considered an attractive entry level.

Fed is back to basics

The slight changes in the FOMC statement yesterday left markets puzzled. As expected, rates kept on hold Wednesday and appeared in no rush to lift interest rates soon. Although the Fed kept the door open for a June hike, the markets are not yet convinced. The immediate reaction to the statement lifted June rate hike expectations to 30% before dropping back below 20% according to the CME Fed Watch tool. Looking back to December’s meeting when the Fed pulled the trigger on the first rate hike, we had a stronger message from the previous meeting in October which stated that “In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation.” This message was not reiterated yesterday. In fact, the only major change was dropping the phrase stating that global economic and financial developments pose a risk to the U.S. economy. Although the Fed acknowledged that economic activity appeared to have slowed, household income, labor markets, housing, and consumer confidence continue to be solid. If U.S. data starts to show improvement after a weak start in the first quarter, speculators are likely to adjust their expectations for a June rate hike, making a strong case for a dollar comeback.After the 2008 financial crisis, Q1 growth has been by far the weakest of the four quarters, and the trend is likely to continue with today’s Q1 GDP set to be disappointing once again. Although some volatility is likely to occur after the release, it will be muted if the figure didn’t deviate considerably from expectations.