Mid-Week Update
The end of negative interest rate policies finally ended this week when the BoJ, as widely anticipated, lifted its policy rate to the new target TONA of 0-10 bps (positive, yes). It also ended YCC (yield curve control), including the cap on long-term rates, although various operations were left in place to be used flexibly in the event of a spike in 10-year JGB rates. It’s all about volatility control by the BoJ.
Relatively dovish statements during the press conferences emphasized the message, however, that accommodative financial conditions will continue for the time being, which helped the JPY climb back to the 150 level to the USD.
The momentum model still remains short USDJPY for now, with the reversal model taking the glory points by indicating the recent bottom very well.
The BoJ usually doesn’t act in isolation without having an eye on what other central banks are doing. They, more than any of the other global monetary leaders, don’t want to look foolish. As such, is there a read-through of their actions as to the upcoming FOMC meeting? What’s the best outcome for the BoJ? A dovish Fed would keep volatility subdued and risk assets bid while also knocking the USD and lifting the JPY, helping ease some inflationary pressures.
The much-chewed-over FOMC meeting is priced to perfection in my view. The market has nudged expectations finally to reflect more realistic easing pricing, given growth and inflation dynamics. This is central banking in reverse. Normally, central bankers should lead markets closer to their reaction function and then deliver. I would be very surprised if the committee wouldn’t take the free option to highlight their agreement with the market’s pricing.
Yes, we all know that only 2 changes are required to shift 2024 dots to 50bps. This would see the UST curve likely bear flatten. As for the longer dots, it would take 3 dot movements to move the long-term dot from 2.5% to 2.625%, which is possible given some of the built-up talk regarding r-star.
When all is said and done, the prevalent market trends will likely continue, unless we see an off-script change of tact to the dovish side, which in my book is a 1/3 probability.
Let’s have a look at what various market segments are currently indicating.