The BoJ Holds with All Eyes on Draghi and the EUR

Earlier in the Day:

The FED delivered on Wednesday, with the final rate hike of the year still retained in the economic projections and $10bn per month sell down of the balance sheet kicking off next month.

We saw the Dollar make a strong recovery on the news, the FED seemingly unwavering in its intent to deliver on 3 hikes for the year, despite the best efforts of New Kid on the Block Kashkari, who has led the doves since becoming a voting member at the start of the year.

The timing couldn’t have been better, with the pressure off the BoJ to a certain extent, as the Dollar rallied to ¥112.22 by the close on Wednesday, with more Yen weakness coming through the early part of the Asian session.

We had seen central banks step back from particularly hawkish commentary in recent months, in response to a more dovish FED and there will certainly be some breathing room now as the markets begin to price in a December move and the unchanged outlook on rates for next year.

This morning, the BoJ held firm on its monetary policy, with only one member voting against maintaining its 10-year bond yield at around zero and its short-term deposit rate at minus 0.1%. There were no surprises with the BoJ having failed to fuel inflation. The BoJ also left its annual government bond purchasing program of ¥80tn unchanged

Other key stats through the Asian session were limited to New Zealand’s 2^nd quarter GDP numbers, which were in line with forecasts, the economy seeing a pickup in growth in the quarter. Barring an initial spike in the Kiwi Dollar, the market response was relatively muted, with election fever gripping the Kiwi ahead of the weekend, Wednesday’s European open spike coming off the back of the Wednesday’s poll showing the National Party surging to a 9 point lead with just days remaining, with the main opposition Party’s support slumping from 44% to 37%.

It’s not over yet for the Labour Party, but the National Party’s grip has certainly tightened at a pivotal time and now it will be down to the market speculation on poll accuracy and any other poll results rolling out before Election Day.

For the equity markets, the recovery in U.S equities on Wednesday in response to the FED’s decision, filtered through, with the weaker Yen driving appetite for Japanese exporters, the Nikkei up 0.18% at by the close.

The Day Ahead:

Following a pretty busy Wednesday, it’s relatively quiet on the economic calendar for the day ahead, with key stats out of Europe limited to the ECB’s Economic Bulletin due out in the hour and stats out of the U.S limited to September’s Philly FED Manufacturing Index and weekly jobless claims numbers.

We can expect the EUR to respond to the ECB’s economic bulletin, through perhaps of greater significance will be Draghi’s scheduled speech this afternoon, the markets now eager for more details on the ECB’s intentions, vis-à-vis the asset purchasing program going into next year.

The FED’s announcement and resultant Dollar recovery will likely have been welcomed by Draghi and the team, with the ECB having been vocally concerned over EUR strength going into the last ECB press conference at the start of the month. We saw the ECB become somewhat cautious on its forward guidance as a result of Dollar weakness and the resurgence may allow Draghi to begin drip feeding the markets.

Based on today’s stats it’s looking Dollar negative, but it’s going to be hard for the Dollar to feel the heat through the day as the markets reposition from a rates off outlook held going into yesterday’s FOMC. The Dollar Spot Index bouncing from 91.626 to an intraday high 92.697 on the FED’s decision, but with the Dollar still languishing from the turn of the year 102 levels, the difference being a shift in ECB monetary policy and negative sentiment towards the U.S administration.

It’s worth giving the Pound a mention after August’s retail sales figures released yesterday morning, the latest economic stats certainly supportive of a November move by the BoE and perhaps a less gradual than intimated outlook, the BoE Governor having curtailed the Pound’s recovery at the start of the week with more dovish than expected commentary. At the time of the report the Pound was down 0.04% at $13.49, with the Dollar Spot reversing earlier gains, down 0.02% at 92.488, the question now being whether the ECB will follow suit and deliver on policy before the end of the year, the big bet for the markets going through the 2^nd and 3^rd quarters having been the EUR.