The Fed, finally
Here we are, the last FOMC meeting of the year. According to the latest Bloomberg survey, the Federal Reserve is expected to lift short-term interest rates by another 25bps – which would bring the target band up to 2.25%-2.50% – to the highest level since March 2008. The chances that Jerome Powell would stand idle today are very thin as the Fed had already widely communicate on a December hike. Backpedalling would send a terrible signal to investors as it would suggest that the US economy could not withstand another rate hike.
Therefore, we expect that the Federal Reserve would come with a dovish hike. During the press conference, Jerome Powell would provide little guidance and emphasize the need for optionality. In other words, the Fed would not commit to any further tightening move and stick to a data-dependent approach.
The big question now is how will the market react? Both the financial and economic backdrops, as well as the huge amount of private and public debts, have made investors less and less confident regarding further increase of borrowing costs. Jerome Powell will therefore have the difficult task to deliver a dovish hike, while remaining at the same time positive about the economic outlook. It promises to be an interesting day in both the equity and FX market. On Wednesday morning, the greenback was trading lower against most of its peers at traders brace for impact, while global equities were grinding higher, suggesting that the Fed would indeed switch to a more dovish stance.
BoJ set to maintain lose monetary policy unchanged by year end
Facing the hardest contraction in four years during the third quarter of 2018, the Japanese economy is facing difficulties amid a weakening business outlook. Recently, the Japanese cabinet has been revising its growth forecast for the economy to the downside for 2018 and 2019 to 0.90% and 1.30% from prior 1.50% estimate while the BoJ is expecting a more conservative scenario for 2019, with annual GDP growth numbers below 1%, thus confirming that the central bank authority will be maintaining its ultra-loose monetary policy by the end of its two-day meeting ending on Thursday.
Indeed, as the Japanese trade deficit is widening in two consecutive times, with November numbers given at JPY -737.3 billion ($ -6.5 billion) due to a sharp rise in imports from the US and stagnant export numbers, it seems clear that the BoJ is not expected to move its policy rate so far maintained at -0.10% since 2016. Additionally, given current state of trade dispute between China and the US, which ultimately threatens a total disruption of supply chains in exporting regions such as Japan, New Zealand and Europe for instance, and the resumption of trade talks with the US in January, it becomes apparent that further trade widening due to lower external demand of goods and larger imports of US goods should occur.
We would therefore expect Japanese export volumes to drop amid a global economic slowdown in the periods to come. However, the outlook could be changing rapidly if uncertainties in the economy start dropping.
USD/JPY is currently valued at 112.37, heading along 111.80 short-term.
