BoJ likely to add downside pressure on USD/JPY - Commerzbank

The BoJ is likely to dash hopes of further significant monetary policy easing, thus adding to the downward pressure on USD/JPY, said Thu Lan Nguyen, analyst at Commerzbank. As regards USD exchange rates, the Fed's long-term forecasts will be crucial at this week's meeting.

Key Quotes 

“Recent weeks have revealed considerable divergences in FOMC members' views about future Fed policy. On the one hand, Fed Vice Governor Stanley Fischer, Boston Fed President Eric Rosengren and Atlanta Fed President Dennis Lockhart have argued in favour of gradual rate hikes. On the other hand, a group has formed including St. Louis Fed President James Bullard, San Francisco Fed President John Williams and board member Lael Brainard who are sceptical with regard to further rate hikes. They believe the US economy has reached a 'new normal', with the equilibrium rate lower as a result, implying that it would be appropriate to keep the key interest rate low on a permanent basis. Which group will gain the upper hand will ultimately be much more important than the timing of the next rate hike. After all, another rate hike of 25 basis points will not increase the USD's appeal significantly.”

“Instead, the crucial question is whether this rate hike will be followed by further ones and if so, by how many. Against this backdrop, currency traders will focus less on the FOMC members' interest rate projections (dot plot) for this year but rather on those for the next few years. Back in June, the Fed saw the long term interest rate in the region between 2.8% and 3.8%. If this forecast were to shift significantly lower, the USD would likely come under pressure even if the Fed keeps signalling that it will hike interest rates as soon as this year.”

“What may be even more interesting than the Fed meeting is meeting of the Japanese central bank. After all, the Bank of Japan (BoJ) said it would present a comprehensive assessment of its monetary policy at this meeting, thus creating some high expectations. Fears that the BoJ may now finally take bold action to drive inflation to its target level and weaken the yen have supported USD-JPY in recent weeks. However, with the BoJ most unlikely to ease monetary policy that much, we see downside risks in USD/JPY.”