Respite from currency market turmoil could be short-lived as BOJ, Fed meet

BALANCE::One analyst said US Federal Reserve officials must convey a message that appeases both doves and hawks when addressing market volatility and pricing

Bloomberg

Mon, Jan 25, 2016 - Page 13

For currency traders who have been battered by increased volatility, this week might turn out to be the moment of truth.

The yen, a traditional haven, retreated last week from the biggest two-week rally since mid-2013 on speculation the Bank of Japan (BOJ) is to increase stimulus on Thursday or Friday to revive inflation.

The US dollar strengthened for a fourth week last week before the US Federal Reserve meets tomorrow and on Wednesday to consider follow-on policy after raising interest rates last month for the first time in almost a decade.

The US$5.3 trillion per day currency market started this year in risk-off mode on concerns that a cooling Chinese economy would send global demand and inflation rates tumbling. Even after a late-week rebound in crude oil and global equities, the yen has been the best-performing currency this month.

“Will central banks come to the rescue, or is what’s going on in China going to dominate? We think it’s going to be the latter,” New York-based Morgan Stanley Inc cohead of US currency strategy Calvin Tse (謝禮頌) said.

“Central banks coming in to ease may release a wave of euphoria into the market that we don’t think is lasting. We’re still bullish on the yen,” he added.

The yen fell 1.5 percent this week to ¥118.78 per US dollar in New York, after touching a one-year high. Japan’s currency gained almost 3 percent over the previous two weeks.

Hedge funds and other large speculators increased net futures positions that profit from yen gains versus the dollar to 37,653 contracts as of Tuesday last week, the most in three years, according to US Commodity Futures Trading Commission data.

Market speculation is growing that the BOJ might expand its stimulus program during its rate review this week. Economists expect a cut in inflation forecasts, and some are not ruling out more surprises.

“We maintain our core scenario of no easing at this meeting, but acknowledge the risk of an unexpected announcement from the BOJ next week,” Standard Chartered PLC economist Betty Rui Wang (王蕊) said.

The BOJ meeting coincides with data, including on factory output and jobs for last month, which could reinforce fears the economy is still struggling after years of stagnation.

The US central bank is also forecast to keep its federal funds rate target unchanged at 0.25 percent to 0.5 percent when policymakers conclude their meeting on Wednesday and investors are to study the policy statement for hints at longer-term trends.

Policymakers have signaled they might raise rates four time this year, while traders are betting on just one increase, with the China-led global slowdown calling into question the need for further monetary tightening.

Against a backdrop of volatile trading in global stocks, Fed officials have in recent weeks shrugged off the impact of financial market swings on their decisions.

However, falling inflation assumptions, coupled with the market turbulence, could lead them to signal deepening concern over the US and world economic outlooks.

“If the statement acknowledges increased risks without mention of expected resilience in the medium-term outlook, this would be a dovish sign,” analysts at BNP Paribas said in a note.

Strategists in a Bloomberg survey forecast the dollar to strengthen to US$1.05 against the euro this year, the smallest annual advance since the dollar appreciation cycle began in 2014.

The US currency is projected to strengthen to ¥125, according to a separate survey.

“It’s going to be very challenging for the Fed to convey a message that satisfies both the doves and the hawks,” Commonwealth Bank of Australia London-based foreign exchange strategist Peter Dragicevich said.

“If they don’t express some concern around volatility, the market could see that as them being more hawkish, but again, if they change tack, the market could say that they’re trying to justify market pricing and that would be more dovish,” Dragicevich added.

Additional reporting by Reuters