One down, one to go

BoJ policy tweak

The yen weakened this morning after the Bank of Japan announced adjustments to its policy framework. Instead of churning out a predetermined amount of money every month the BoJ will print whatever is necessary to maintain a 0% yield on ten-year Japanese government bonds.

Until today every BoJ policy announcement this year has been followed by a strengthening yen. Today it went down, falling by -1%, principally because investors had not really expected any change to policy. The BoJ will have had one eye on the financial sector when it decided to support bond yields: negative yields create all sorts of problems for banks, insurers and pension funds. It will have had the other on the dwindling supply of suitable assets: the central bank already owns around 40% of all government bonds and it is a top-five shareholder in more than 80 of the country's biggest companies.

The yen was the weakest performer on the day, trailing sterling and the Swedish krona by -0.2%. It was down by -0.8% against the North American dollars and by -0.4% against the euro.

Rand rally realised?

The South African currency led the field for a fourth successive day, matching the high against the US dollar that it achieved two weeks ago. Where it goes next will have a lot to do with the Federal Reserve's rate decision later today. 

Over the same four-day period the second- and third-best performers were the Australian and New Zealand dollars. All have been helped by the perception that the Fed will hold back from raising its Federal Funds rate today. Although there has been nothing special about the recent SA economic data, continuing low interest rates are seen as a positive for commodity exporters and emerging markets and the rand serves as a proxy for the less liquid emerging market currencies.

It starts the day nudging technical resistance against the dollar. A no-change decision by the Fed could help it to break through that resistance and move ahead towards the highs of mid-August: a rate increase would scupper than plan and send it south. 

Two out of 24 ain't bad

Only two of the biggest two dozen New York investment banks and brokers think the Fed will raise its benchmark interest rate by 25 basis points today. The other 22 don't. Even so, if Barclays and BNP expect a rate hike it does put the possibility of one on the table.

If, as the majority believes, the Fed leaves policy unchanged it will be words and dots upon which investors focus this evening, The words will come from Fed chairperson Janet Yellen at her press conference: the dots will be on the chart of FOMC members' ambitions for rates in the future. Are most expecting a rise this year and how many (more) increases do they see in 2017?

The Reserve Bank of New Zealand will also make a policy announcement tonight. No change is expected.