The USD has been capped, although yesterday’s FOMC minutes release made a bigger case of the central bank tightening monetary policy in December. Our economists note that the most prominent change was an explicit reference to the December meeting as a possible time to start hiking rates. However, it must be noted too that policy makers discussed the longer-term challenges - e.g. equilibrium real rate close to zero and the need to consider alternative easing options in response to excessive tightening in financial conditions.
From that angle the minutes did not exceed hawkish market expectations and the greenback may be subject to some additional position squaring related downside risk, in particular against the EUR. This is especially true should today’s ECB minutes show that there was a range of views about the need for further easing. This may come as disappointment to those believing that there is a strong consensus at the Governing Council for more easing on Dec 3.
In Japan, the BoJ left monetary policy unchanged in line with market expectations. This is regardless of still muted growth and price developments. However, central bank Governor Kuroda reiterated that the inflation trend is improving, even if they stay ready to adjust policy as needed. Looking ahead, we remain of the view that the central bank will act anew in order to make a case of sustainably improving price developments.
However, given the latest developments it appears that the JPY should stay driven by external factors such as risk sentiment rather than monetary policy expectations. If anything we stay in favour of selling the currency, in particular against the USD.
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