Dollar Eases As Key Events Still Awaited

The Reserve Bank of New Zealand and Sweden’s Riksbank can still surprise investors, but it is the BOJ and FOMC meetings that are the talk of the markets.  

Surveys suggest that around 40% of investors expect the BOJ to expand its asset purchases program this week. We are less convinced. Moreover, many real money clients spoken think the BOJ sticks with its current target of increase base money by JPY80 trillion a year. This raises the possibility that the surveys are not sufficiently up-to-date. 

There appears to be no pressure from the Abe government on the BOJ. Finance Minister Aso and two government advisers have downplayed the need for more action now. BOJ officials we have spoken with of course did not reveal what the central bank will do, but they pushed back against the arguments that emphasize the urgency of new action.

The BOJ wants to look past a rare but dramatic drop in oil prices, even though it formally target a narrow definition of core inflation (CPI excluding fresh food). It also recognizes that inflation expectations are firm. A BOJ survey of consumers found the perception that prices are rising around 5% year-over-year. Businesses also expect greater price pressure next year. There are reports suggesting Japanese households are showing a new preference for fixed rate mortgages.  

BOJ officials recognized that GDP may have contracted in the July-September quarter.  However, this also did not seem to instill a sense that a monetary policy response was required. The problem is that potential growth is so low that the normal variance could see an occasional drop into negative territory without signalling economic deterioration. Boosting trade growth is not a function of monetary policy, but underlies Abenomics 2.0. 

No one expected the Federal Reserve to change policy tomorrow. Those who expect a move this year after focused on the mid-December meeting.   The overall assessment of the US economy is unlikely to have changed significantly. It will be interesting to see how it characterizes the labor market after two soft nonfarm payroll reports. However, other readings on the labor market do not confirm the deterioration. Specifically, the ADP estimate showed no marked slowdown in employment and the weekly initial jobless claims (four-week average) is at new cyclical lows.