Consolidation continues to be the overarching theme witnessed in financial markets to begin the week, with all eyes on the Federal Reserve and Bank of Japan’s monetary policy decisions later in the week. The yen has been the big mover in currency markets overnight, with investors weighing the potential outcomes from the BoJ and reducing their expectations any new policy actions will be introduced. As such the yen has outperformed against the big dollar this morning and has driven USDJPY down almost a full figure, with the yen strength weighing on the Nikkei that ended up shedding 0.9% during the overnight session. We tend to agree that rhetoric from policymakers suggests there is no urgency to act on the monetary policy front, but also highlight the propensity of the BoJ to favour a surprise approach to monetary policy announcements, and therefore wouldn’t recommend corporates that are naturally long JPY head intoFriday’s announcement without some form of protection. In an environment where there is ample likelihood volatility will be elevated post-announcement, option strategies are prudent hedging tools that can be used in order to harness the volatility associated with such an event like a central bank meeting.
The euro is succeeding in frustrating the shorter-term bears who were hoping momentum from last week would continue, with the common-currency in a holding pattern as participants wait to digest the Federal Reserve interest rate announcement on Wednesday before deciding on a direction for the EURUSD pair. The ECB’s Praet was consistent with Draghi’s message from last week that a number of monetary policy tools could be used to push inflation higher in the Eurozone, though additional specifics are still lacking. A combination of interest rate cuts and an extension of the current program seem a likely course of action for the ECB to implement at the December meeting, though investors are currently focused on combing through tomorrow’sFed statement to uncover any hints as to if the Fed will choose to embark on their rate tightening cycle in December. We feel any additional hints as to if and when the Fed will move interest rates off their lower bound will come in the form of comments around the health of the labour market and the international situation, and if the Fed promotes the recent stability in international volatility, this will ratchet up expectations the Fed is getting closer to policy liftoff. While there is close to no chance in seeing any change in policy at the conclusion of the FOMC meeting tomorrow, we note there is a slight upside risk to the buck given the relative calm that has subsided over global equities markets since the September meeting.
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