Global equity markets are continuing with their cautious start to the week, with the somewhat pessimistic tone to the overall market environment spurred by a less dovish Bank of Japan than markets had been expecting. While the central bank did keep policy unchanged as had been expected heading into the meeting, it removed previous language surrounding the ability to lower interest rates further into negative territory if judged as necessary. That said, the BoJ did cite that recent downgrading of inflation expectations along with the risks to its price target, which would suggest despite the no change in policy at today’s meeting, the Bank of Japan can’t be ruled out from providing additional stimulus measures in the coming months. In our opinion further monetary policy accommodation from the BoJ would be incited by a further deterioration in the domestic situation, especially in regard to inflation expectations, but may also be prompted by a lack of encouraging progression towards the BoJ’s elusive price target. The firming of the yen against the greenback has weighed on risk appetite, with the Nikkei finishing its session lower by 0.68%.
The softness in energy markets is also contributing to the lack of enthusiasm towards assets correlated with positive risk appetite, with front-month WTI ceding additional gains and continuing its declines on the week. Focus for the moment has returned to the fundamental oversupply issue in the oil market, with participants lacking confidence the right pieces are in place to produce a production freeze without Iran’s participation. Consequently, oil has fallen for the second day, dragging the loonie and other commodity-linked currencies lower against the American dollar ahead of the opening bell.
As we get set for the North American session, the pessimistic cloud hanging over risk appetite has meandered its way into Europe and is leaking into North American ahead of the opening bell. After a relatively quiet period for US economic data, retail sales and producer prices are both due to be released this morning, and though insufficient to influence decision making policy from the Federal Reserve ahead of tomorrow’s announcement, they will help form market expectations on whether a rate hike later in the year will be warranted. Expectations from economists are to see some softness on the retail sales headline print when compared to January’s number, though the retail control number that feeds more directly into GDP is forecast to remain firm on a month-over-month basis. A constructive outlook for consumer demand paired with further progression on the inflation side of things should led to a firming in US yields, though we would expect any sort of reaction to a deviation from expectations will likely be muted with the Fed on deck tomorrow. And while tomorrow has the ability to be somewhat of a non-event, there is the potential for fireworks to be generated as a result of the updated summary of economic projections. Given the recent stability in international equity markets, the decline in the trade weighted value of the USD, and the relatively constructive outlook in regards to inflation expectations, there is what we would consider a green light for the Fed to go ahead and raise rates tomorrow. Understanding the cautious nature of the Fed reins in expectations for any action from the Fed tomorrow, though we would highlight the aforementioned points do add topside risk to price action in the greenback if a more optimistic statement and summary of economic projections leads to a firming in US yields.
Further reading:Get the 5 most predictable currency pairs