Weekly Market Review 6-12/04/2015

Bank of Japan: Ready for More?

After having been out of the spotlight for a while, this month, the market’s focus on the Japanese Yen resumes. With the Bank of Japan (BOJ) set to release its monetary statement this Wednesday, expectations of yet another increase to the already massive Quantitative Easing program (i.e. money printing) are running high. Ever since BOJ Governor Kuroda took the helm of the Japanese central bank, the BOJ’s singular focus has been to raise inflation back to its 2% target which, of course, led to the massive QE program that caused the Yen’s troubles. Now, with the risk of inflation running, once again, below zero, bets are on for another round of stimulus to weaken the Yen even further. While at its last meeting the BOJ had ruled out action on lower inflation amid lower Oil prices (which are deemed as an outside factor), the same is not true for Core Inflation which neutralizes food and energy prices. Core Inflation, according to analysts, could plunge below 0% as well and might be an embarrassment to the BOJ. Therefore, many believe the BOJ will act this week in order to “save face.”

So, will the BOJ act or take a wait-and-see stance? Essentially, there are two major possible scenarios for this BOJ meeting; the BOJ could act and ignite another Yen sell-off thus weakening the Yen vs the Dollar, the Aussie and Kiwi and even possibly against the Euro and Sterling, which means a rally in Yen pairs that rise when the Yen falls. The other option? If the BOJ decides that the situation has to deteriorate much further to warrant more stimulus; this could cause the Yen to bounce off its lows, although the move might be a moderate one as the outlook for Japan’s inflation is still dim.

Crunching the Fed’s Minutes

One major central bank decision is enough to make any trading day important, but two? Two are certainly enough to underpin Wednesday as a pivotal day for the week. With the BOJ statement dominating the Asian session, as the day progresses and volumes shift from Asia to London to New York, investors’ focus will shift to this week’s main event, the release of the FOMC meeting minutes. Why? Because Janet Yellen, the Federal Reserve Chairperson, had dropped the word “patient” from the Fed’s statement at the March meeting which opened the door for a rate hike, possibly as soon as June. Investors will read through the Fed minutes, which is the protocol of the meeting, and try to crunch all the words and votes by FOMC members and then gauge whether or not the Fed is really close to raising rates in June. If the minutes reveal an upbeat Fed, this may suggest that a June rate hike is still an option. However, if the minutes reveal a divided Fed, with some members, including Yellen, worried about low inflation, it would mean the rate hike might be postponed for a few more months.

Down to Business

In general, this week will revolve around the two events both occurring this Wednesday so sentiment could tilt either way. Overall, the BOJ decision to act or not will determine the Yen’s direction and sentiment for the Nikkei while the FOMC minutes are expected to stir sentiment across the globe and across assets, from world indices to commodities to FX. If the Fed rate hike does seem closer, this is expected to benefit the Dollar and would be negative for indices and commodities, while a more distant rate hike (that is largely a result of a less upbeat Fed) could cause Dollar buy positions to liquidate and ignite a Dollar correction while pushing commodities, indices and Dollar peers higher.

On the Plate

ISM Non-manufacturing (Monday) – Will shed light on the performance of the US series sector and will mostly affect indices on Wall Street.

RBA Rate Decision (Tuesday) – If the Reserve Bank of Australia will surprise with another rate cut the Aussie could slide lower.

BoJ rate decision (Wednesday) – If the BoJ decided to add move stimulus the Yen is expected to fall against a basket of currencies while the Nikkei 225 stands to gain.

FOMC Minutes (Wednesday) – The main event of the week. If the FOMC minutes point to an imminent rate hike and by imminent we mean June, the dollar stands to gain against its peers while commodities, indices stand to suffer and vice versa.

BoE Rate Decision (Thursday) – No surprise rate hike is expected from the BoE. Nevertheless if the rate decision will reveal a pessimistic BoE the sterling could slide lower.

Chinese CPI(Friday) – If Chinese inflation will slide lower the PBoC will be expected to cut rates further which could impact all china related trades.

Chart of the Week – DAX


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