Central bankers have taken center stage for the next two days, with the Bank of Japan concluding their monetary policy meeting overnight, while the FOMC is on deck to release their monetary policy decision Wednesday. As had been the consensus estimate, the BoJ decided to keep their asset purchase program unchanged, willing to take more time to assess the inflationary landscape before deciding to alter the size of the program. While Governor Kuroda did mention there is potential to see core consumer prices fall on a year-over-year basis, he stuck to his guns on asserting inflation would reach the central bank’s goal of 2% within a two-year timeframe. While Kuroda and the BoJ seems content to look past falling oil prices as transitory in nature, we are less sanguine, and expect the BoJ to capitulate on its inflation timeframe later this year, increasing the size and scope of asset purchase in the third quarter, almost a year after the last escalation in purchases. The risk to that assessment is if wages pick up dramatically over the first half of 2015, though a major factor influencing this calculation is the BoJ counting on export-based companies that have gained from the weak yen to boost employee pay; hoping this translates into stronger consumer spending and domestic demand. The Nikkei was already trading in positive territory ahead of the BoJ announcement as sentiment from the optimistic close on Wall Street filtered through to the Asian session, and the monetary policy decision did little to ultimately rock the boat with the regional equity index posting a gain of 0.99% on its session. The yen is slightly stronger this morning given the BoJ has yet to waver on its inflation timeline, though USDJPY continues to hold on the north side of 121.
The DXY is witnessing another day of profit taking as traders square up positions ahead of the FOMC statement tomorrow. The release of the FOMC’s statement tomorrow is important because if the Committee decides to alter the current forward guidance by removing the ‘patient’ language, it moves the Fed to being more data-dependent as opposed to being tied to rough timelines given the wording in previous interest rate statements. While the consensus is for the ‘patient’ language to be removed tomorrow, we would caution there could be heightened volatility even if the Fed acts in accordance to how participants are expecting. Given the hawkish developments inherent in the progression of the Fed’s forward guidance, the removal of the key phrase does not unequivocally suggest a rate hike it imminent. Outside of the labour market, economic indicators have been missing to the soft side of estimates, which have slammed the Citi economic surprise index to three-year lows, and telegraph GDP growth in Q1 will come in below current trend. While soft GDP growth for a quarter does not explicitly detour the first rate hike from the Fed in either June or September, we do think the slope of interest rate movements in the US will be less steep than markets currently anticipate, and that a movement away from meeting-based forward guidance to data dependency will heighten two-way volatility.
As we head into the North American open, equity futures are recovering off their overnight lows after housing data in the US over the month of February came out mixed, throwing some cold water on the prospects of an overtly hawkish Fed tomorrow. Housing Starts decreased by 17% on a m/o/m basis to just 0.90M as an annualized reading, though Building Permits helped cushion some of the blow, as the amount issued increased by 3% on a m/o/m basis to print at an annualized rate of 1.09M. The DXY has remained soft after the economic releases, with EURUSD climbing north of the 1.06 handle before the opening bell. The loonie has experienced whipsaw price action this morning, unable to take advantage of the consolidation in the greenback as WTI pivots around the $43 handle and Manufacturing Sales collapsed by 1.7% from December to January. Weaker manufacturing sales in January have kept USDCAD from moving too far away from the 1.28 handle, though it is likely the pair won’t deviate too far from this psychological pivot ahead of tomorrow’s FOMC announcement.
Further reading:
USD/CAD: Trading the Canadian Wholesale Sales
US housing starts fall hard; building permits rise in February
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