Happy Fed Day

Yesterday’s Bank of Japan (BoJ) decision to exit the negative rates went quite smoothly for equities and bonds, relatively disquieting for the yen. The USDJPY spiked past 151.50 this morning on BoJ’s commitment to keep the policy as accommodative as possible and keep buying Japanese government bonds until it’s sure it hits the 2% target – from the downside. The EURJPY hit a fresh high despite the dovish vibes from the European Central Bank (ECB) and a hawkish move from the BoJ.

Certainly, the BoJ meeting was perhaps the biggest disappointment of the year for the yen bulls, but for the Nikkei bulls and the overseas – especially US bond markets – there is relief that the BoJ normalization will remain soft and slow. The Nikkei index threw itself back above the 40’000 mark and will likely be seeking fresh records. The end of the ETF purchases will do little as the BoJ bought only around 210bn yen worth of assets last year – that’s around $150 mio for a USDJPY rate of 140, and they bought none this year. The Japanese companies earnings are robust, they benefit from the US-China tensions, a cheap yen, ultra-lose monetary conditions and corporate governance reforms. On the other hand, the yield differential between Japan and major counterparts remains high enough to prevent the Japanese investors from bringing their money back home in a hurry. In summary, the yen should still appreciate once the BoJ reaction is over, but the selloff in Japanese bonds will likely remain limited and outlook for the Japanese stocks remains positive.

Fed day

Unlike the expectations of the beginning of the year, the Federal Reserve (Fed) will most probably keep the rates unchanged today, update its dot plot and maybe give a hint on whether they will start slowing QT. Given the recent uptick in inflation, strong economic growth, healthy jobs market and robust earnings, we could see some Fed members plot fewer rate cuts for the year and the latter could tilt the median forecast to 2 rate cuts this year from 3 plotted in December.

But because that expectation is broadly reflected in the market pricing, there is a chance that a hawkish picture from the dot plot sees limited reaction if the Fed gives any hint that it will slow its balance sheet unwinding.

The dollar index is pushing higher into the decision, the 2-year yield is down below 4.70%, the S&P500 flirts with ATH levels, as Nvidia bulls showed back in force despite a disappointing kneejerk reaction to the company’s new Blackwell chip that should improve the performance of AI computations.

FX and commodities

The EURUSD is testing the 100-DMA to the downside before the Fed decision, while Cable is preparing to return to the December-to-March down trending channel following a softer-than-expected inflation report released just this morning in the UK. Both headline and core inflation jumped less than expected on a monthly basis and fell more than expected on a yearly basis. The actual numbers are still sensibly above the Bank of England’s (BoE) 2% policy target, but the trend is encouraging and should give a further boost to the BoE doves before tomorrow’s MPC meeting. The BoE is not expected to make a change to its rate policy tomorrow yet any shift in MPC members preferences could modify the expectation for the timing of the first rate cut – which is not expected to happen before June.

In commodities, strong US dollar and rising US yields pressure gold prices to the downside, while US crude extended gains extended gains past the $83.50pb yesterday after the latest API data showed that the US oil inventories continued to drop on the week to March 15th. Trend and momentum indicators remain positive for a further push toward the $85pb mark, though the overbought conditions and any loss of appetite following the Fed decision could trigger a minor downside correction.