Week Ahead Bank of Japan in the Spotlight

BOJ weighing next action after Fed rate hike

The USD is higher across the board after the Fed finally announced its much awaited rate hike. The market had already priced in the 25 basis points rate hike to the Fed funds rate, but the hawkish tone of the FOMC statement, dot plot and Fed Chair Janet Yellen’s press conference have boosted the USD and solidified the strong dollar rally. Improving U.S. economic conditions were cited and the expectation now is of at least 3 rate hikes in 2017. The effect of those improved forecasts have been felt around the globe.

The Bank of Japan (BOJ) will release its Monetary policy statement and press conference between the end of Monday and the beginning of Tuesday December 20 EST. Analysts are expecting the central bank to keep the quantitative easing unchanged and negative rates on hold. The weak JPY and hawkish U.S. growth expectations have given the BOJ room to hold and even improve its economy assessment.

The Bank of England (BoE) and Swiss National Bank (SNB) both kept their monetary policies unchanged after the Fed and is now up to the Bank of Japan to close the year for major central banks.

The EUR/USD dropped 0.745 percent in the last 5 days. The single currency is trading at 1.0454 after the U.S. Federal Reserve hiked the U.S. benchmark rate as expected. The hawkish rhetoric from the statement and Fed Chair Janet Yellen’s press conference boosted the USD. The move from the Fed followed the European Central Bank (ECB) extension of the quantitative easing program, although the amount was tweaked with President Mario Draghi quickly pointing out it’s not tightening. The move was a clever way to appease both sides of the council. For the doves, there is more time for the QE program to run, while for the hawks there is a reduced amount that could be read as tapering without being called that. The Fed learnt the hard way that its hard to predict a market reaction to a taper announcement after the now famous “taper tantrum” of June 2013.

The ECB is gearing up to a difficult year. If anything 2016 showed the market the climate for political change and the far reaching impacts of the protest vote. With elections in Italy, France and Germany as well as the developing saga of Brexit there will be plenty of political risk jolting European markets.

Bundesbank President Jens Weidmann was bolder on Friday with his statement that monetary policy was powerless in reviving euro zone growth. The German has been a longtime critic of the ECB’s stimulus as it takes the urgency away from much needed government reforms at the national level, which in Weidmann’s view are the ones responsible for boosting growth.

The USD/JPY gained 2.116 percent in the week. The Yen is trading at 117.79 on the back of the Fed’s monetary policy decision and the possibility of 3 or more rate hikes in 2017. The biggest event risk will be which decision the Bank of Japan (BOJ) announces. The JPY has lost more than 13 percent since the results of the U.S. election, but a depreciation of the currency has helped the local stock market as an average price of 115 could boost corporate profits as much as 20 percent. The December Tankan survey showed positive business sentiment hitting a one year high which together with the USD strength could delay the BOJ from changing its monetary policy at the end of 2016.

The BOJ is also looking into alternative methods of fighting deflation after its massive QE program started with much promise only to face an uphill battle as global conditions deteriorated. Financial education is now being touted as one possible solution to unlock Japanese savings and put them to work by investing into asset management. There is plenty of scepticism on the results this route taken by the central bank, but after the printing press has not worked as desired, maybe education can be the solution.

The markets are awaiting the final outcome from the BOJ meeting before starting to ease into holiday mode. 2016 has been a bumpy ride from the beginning and traders will be looking for some time off to reflect on the hard lessons of this year and how to apply them to the next one.

Market events to watch this week:

Monday, December 19
4:00am EUR German Ifo Business Climate
7:30pm AUD Monetary Policy Meeting Minutes
Tentative JPY BOJ Policy Rate
Tentative JPY Monetary Policy Statement
Tuesday, December 20
Tentative JPY BOJ Press Conference
Wednesday, December 21
10:30am USD Crude Oil Inventories
4:45pm NZD GDP q/q
Thursday, December 22
8:30am CAD Core CPI m/m
8:30am CAD Core Retail Sales m/m
8:30am USD Core Durable Goods Orders m/m
8:30am USD Final GDP q/q
8:30am USD Unemployment Claims
Friday, December 23
4:30am GBP Current Account
8:30am CAD GDP m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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