Financial market research and analysis

The Federal Reserve (Fed), the Bank of Japan (BoJ), the Bank of England (BoE) and the Central Bank of Turkey (CBT) will announce their latest policy verdicts throughout this week. Expectations vary.


Fed to hike rates, deliver hawkish statement

The Federal Reserve (Fed) monetary policy meeting is the main highlight of the week for the US dollar traders. The FOMC is expected to raise the Fed funds rate by 25 basis points to 0.75% to 1.00% on Wednesday.

Although the Fed rate hike is priced in at 100%, the Fed watchers will be focused on the dot plot to catch any hints regarding the future of the Fed policy.

The Fed could steepen the rate normalization in 2017 and hike rates more than three times as anticipated until the beginning of March. The consensus shifts toward an overall 100 basis points hike via four actions in 2017.

If the Fed’s accompanying statement is sufficiently hawkish, the US dollar could take another ride on the upside. According to the latest CFTC data, the net speculative USD long positions surged to the highest level since February.


Will the BoJ comment on lower bond purchases?

Japan started the week on weak economic data. The machine orders in Japan contracted by 3.2% on month to January; consequently machine orders declined by a significant 8.2% on yearly basis. The yen depreciation has apparently failed to reverse the declining trend.

The producer prices in February rose by 0.2%m/m as expected, pushing the yearly figure to 1% versus 0.5%y/y printed a month earlier. The rise is mostly due to the global reflation trend on oil and commodity prices. On the other hand, the consumer prices ex-fresh food printed 0.1% y/y in January, suggesting that the BoJ has little choice but to keep the policy loose.

The Bank of Japan (BoJ) meets later in the week and is expected to maintain the monetary stance accommodate. Nevertheless, according to many, the BoJ could hint at tapering in monthly asset purchases given that it has already reduced the pace of its asset purchases over the last month. Bloomberg reveals that at the current speed, the BoJ would miss its annual asset purchases target of 80 trillion yen. They would buy 66 trillion yen instead and announce a target range for the 10-year JGB yields. An eventual tapering would be due to the BoJ’s will to minimize the implications of negative interest rates, especially on pension funds and financial institutions, and the lack of JGBs on the markets rather than a will to tighten the monetary conditions per se.

The BoJ is expected to maintain the loose monetary conditions, yet could bring forward another set of tools, perhaps more appropriate for long-term strategies.

In fact, if there were a good time for the BoJ to test an eventual readjustment in its bond purchasing program (QQE), it would certainly be now given that the hawkish Fed divergence should keep the buying pressures limited on the yen.

In the mid-term, the market expectations for the USDJPY are positively biased.

However, the near-term direction in USDJPY will depend on this week’s BoJ and Federal Reserve (Fed) monetary policy meeting.

The USDJPY started the week slightly bid against the greenback. Light offers are eyed at 115.00/115.50 (weekly resistance), before the critical 115.92 (major 61.8% retracement on December – February decline). Buyers trail up from 113.55 (50-day moving average & weekly support).

Nikkei (+0.15%) and Topix (+0.22%) traded marginally higher on stronger yen.


House of Commons votes as May seeks approval to trigger Brexit

On Thursday, the Bank of England (BoE) is expected to maintain the status quo. Despite the rising inflationary pressures, the Brexit uncertainties give little maneuver margin to the bank. Monetary conditions need to be loose to minimize any eventual squeeze in the economic activity due to the Brexit. The BoE is ready to tolerate a higher inflation.

On the other hand, PM Theresa May waits for the Parliament’s approval to fling herself to trigger the Brexit discussions by the end of March. The House of Commons will vote today on whether or not PM May would be authorized to trigger the Brexit. Cable gained 0.51% against the US dollar on the back of a broadly softer greenback. Trend and momentum indicators remain comfortably bearish for the sterling, as the Brexit worries dent buyers’ appetite.

Traders are expected to sell into the rallies moving into the FOMC meeting. Any hawkish surprise from the Fed would widen the monetary policy divergence between the Fed and the BoE and could encourage the GBP-bears for a further slide toward the 1.20 mark against the greenback.

The cheap pound is supportive for the FTSE. Mining stocks (+1.50%) outperformed at the London open on the back of firmer copper futures (+1.35%).

Rio Tinto (+3.05%), Glencore (+2.75%), BHP Billiton (+2.33%), Anglo American (+3.77%)

BP (-1.00%) and Royal Dutch Shell (-0.41%) shred five points from the FTSE 100 at the open.

On a side note, the barrel of WTI traded down to $47.90 in Asia, in the continuation of headwinds following last week’s solid increase in the US oil inventories. If the US keeps the current production pace, the OPEC cuts could no longer sustain the global oil prices but reducing supply. WTI-bears are touted at $50.


Turkey expected to raise late liquidity lending rate

The Central Bank of Turkey (CBT) is expected to maintain the weekly repurchase rate and the overnight lending/borrowing corridor unchanged at April 16th monetary policy meeting.

The CBT is however expected to raise the late liquidity lending rate from 11.00 to 11.50% as a better safety net in case of higher stress during the month into the critical constitutional referendum.

The lira (-0.50%) started the week weaker against a broadly softer US dollar. Rising political tensions with Netherlands pushed the USDTRY past 3.75 at the start of the week. Combined to hawkish Fed expectations, the positive momentum could gain further momentum to re-test the 3.78/3.80 area.