Although a no-chance stance is the widely expected outcome, the focus will be on the language of the post-meeting policy statement. Second, USD/JPY pair spiking spiking higher, and last the GBP/USD pair that stayed in the bullish zone.
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Negative rates on excess deposits are, in essence, a cost for a bank; but if that same bank is offered a loan with a negative-rate from the Central Bank, that’s kind of like amortization in an asset. Not much about the ECB’s public pronouncements on Thursday was unexpected.
Perhaps this is what the yen needed to make the extended sell off: USD/PY shot 100 pips to the upside, finally breaking back above 110 and reaching a high of 110.46 so far.
“For Japan to achieve its mission of completely escaping deflation, the BOJ has to consider further expansionary policy”, mainly through further lowering the interest rate, said Iwata, now president of the Japan Center for Economic Research.
There will, however, then be strong upward pressure on the yen if the bank fails to deliver additional easing.
Asian shares dropped on Monday while the dollar slipped as investors took profits from the currency’s recent gains ahead of central bank meetings in the United States and Japan this week.
The U.S. Federal Reserve, the Bank of Japan (BOJ) and the Reserve Bank of New Zealand (RBNZ) are all set to meet this week. This would entail the implementation of negative lending rates to financial institutions in Japan.
Steven Englander, global head of G-10 currency strategy at Citigroup, said one reason the yen rallied after the BOJ joined the negative interest rate club in January was because investors felt there was little more the bank could do without damaging the financial sector.
The one thing that is certain is that the Yen is primed for volatility. Therefore, the effectiveness of the BoJ’s easing tools and tactics has come into question.
The yen weakened and Japanese equities popped on speculation that the BOJ would enact further stimulative measures to prop up slowing economy. The S&P 500 and Dow Jones Industrial Average both hit fresh highs for the year last week, but technology shares retreated Friday as disappointing earnings reports from MicrosoftMSFT -7.17 % and Alphabet weighed on the broader market. The question still remains, however, as to what sustainable effect that might have on the yen. The Dallas Federal Reserve is due to release the results of its manufacturing survey for April at 10:30 am ET.
Its policymakers are expected to hold interest rates steady, but may tweak their description of the US economic outlook to reflect more benign conditions, leaving the path open for future rate rises. At the current time, Fed Fund futures are pricing-in only around a 1% probability of a rate hike next week, although the probability of any rate hike by the end of the year increases dramatically to almost 70%.
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Reports coming out of Tokyo say that the Bank of Japan could announce more stimulus next week. If the Fed continues its increasingly dovish progression, the dollar could extend its weakness of the past few months.
