It has been an uneventful week for USD/JPY, which has posted small gains in the Wednesday session. In North American trade, the pair is trading at 111.70. On the release front, Japanese All Industries Activity posted a strong gain of 2.1%, its sharpest gain since June 2011. In the US, Existing Home Sales improved to 5.62 million, beating the estimate of 5.54 million. Crude Oil Inventories posted a sharp drawdown of 2.5 million, larger than the estimate of -1.2 million. On Thursday, the US releases unemployment claims.
The BoJ released the minutes of its April meeting on Wednesday. Policymakers said that under the bank’s asset-purchase program, the amount of government debt purchases would fluctuate, but this did not pose a problem. The minutes also noted that members were optimistic about exports and industrial production. Although the economy has been boosted by stronger global demand, BoJ Governor Haruhiko Kuroda has insisted that the bank’s ultra-loose policy would continue until inflation has reached the 2% target. Although the bank shows no signs of exiting its quantitative easing scheme, the BoJ has reduced its purchase of bonds. If this continues, bond purchases could slow to JPY 60 billion/year, down from the current 80 billion/year. The IMF is closely monitoring the BOJ’s monetary policy, and on Monday, David Lipton, the IMF’s first deputy managing director said that it supported the BoJ’s target of 2.0%. At the same time, Lipton expressed doubt as to whether the bank’s current policy would push inflation up to this level.
The Fed has tightened policy twice this year and has hinted at one more rate hike in the second half of 2017. As for the markets, they have circled the December policy meeting as the most likely date for a rate move. The CME Group has pegged the odds of a September hike at just 13%, compared to 18% a week ago. However, the odds for a December increase are at 49%, and this could increase if Fed policymakers continue to wax positive about the economy. Earlier this week, Federal Reserve of New York President Charles Dudley continued the upbeat message, cautioning the Fed against halting its current tightening cycle. Dudley said that the tight labor market should lead to higher wages, which in turn would push inflation to the Fed’s target of 2.0%. The markets like what they are hearing – not just the positive spin on the economy, but also that the Fed has signaled that it plans to reduce the bloated balance sheet of $4.2 trillion.
