Personally I cannot find enough evidence that can justify a Fed hike tomorrow for a variety of different reasons. I expect that Fed will keep a very hawkish tone and will send a clear message that is ready to hike on December. We expect a very interesting and full of new news FOMC
Why Fed will not hike?
• The USA macroeconomic data during the last month has lost momentum only last Friday’s USA core CPI number was stronger than many expected however this is not enough to justify a rate hike at this stage
• Political uncertainty over the health status of Clinton and USA elections rising
• Fed hates to surprise markets and most importantly to create volatility and uncertainty.
• Many economists support that despite the significant steps that took place in USA economy the last years a rate lift will trigger an economic recession which will force Fed later not only to cut even lower the rates but also do introduce another round of QE
Why Fed might hike?
Low interest rates for so many years creates bubbles to economy. Many fed members have supported that is better to lift rates earlier than later in order to avoid economic overheat. Moreover they support that any hike is going to be minor and almost insignificant factor for the economy as rates are close to zero for first time than ever before
Since financial crisis USA domestic economy had a significant improvement which justifies a rate hike.
With this movement fed will show its determination and that is not influenced bt markets. Also a rate hike will help Fed to regain its credibility on the markets and send a message that the USA economy is very strong.
What to trade?
Even if BOJ do not introduce aggressive easing, the Fed hawkish language tomorrow will not leave a lot of opportunities for USD/JPY bears. We see high probabilities for some aggressive bullish movement for USD/JPY
When BOJ started quantitative easing programme in 2013, BOJ Kuroda promised that within the next two years inflation will hit 2%. Three years later inflation has not even touch 1% obviously BOJ Kuroda has lost his bet and has damaged seriously his credibility. Our view is that BOJ will impress markets with huge stimulus however we must see crucial changes to BOJ policy meeting in order to have an aggressive market reaction. Today a former BOJ official supported that BOJ must change the inflation target lower than the existing 2% because 2% seems unrealistic. The reality is that if Kuroda lower inflation target then is like he admits his failure. I think that Kuroda will avoid to do it as its credibility will be damaged even more. The most anticipated scenario is that the BOJ will cut its rates further from -0.10 to – 0,10 and will purchase a larger amount of assets 90 trn from existing 80 trn. We think that the most possible scenario is to do both. Here we should remind that BOJ July meeting largely disappointed markets.
The last months many support that BOJ and central banks running out of options and time. We think that central banks can stay more accommodative for much more time than the average investor thinks so BOJ can adopt a variety of different tools. BOJ has the ability to buy Japanese government bonds, adjusting the maturities of bonds eligible for purchase, boosting spending on commercial paper, corporate debt and exchange traded funds, are also very likely scenarios.
Here we should be cautious. Market has high expectations from BOJ.. A small cut on rates or some more QE will not fulfill market’s expectations. In order to see Jen to plunge and stock market to skyrocket BOJ should done much and of course introduce a new more even more dovish language
We should not forget that the current negative interest rate policy which have introduced by ECB and BOJ is something new and has never occurred before so there is not predictable outcome for this global experiment
Some trading tips:
BOJ decisions are by far the most complicated from major central banks as we do not have direct access to details (as we got with FED and ECB). That makes hard and risky to trade BOJ announcement. We suggest to forex traders who have not enough experience to trade very carefully or even do not trade the BOJ decision particularly the first hours where the details will be conflict and unclear. The best time to trade this week is after tomorrow’s night Fed decision and press conference where we will have all details from both central banks in order to make comparisons and get the right decisions. We will have a much better control and can manage better our risk by trading after than before a monetary policy decision. We want to protect our capital from 200-400 pips possible movements that can take place within few movements.