Forex Institutional Research: Societe Generale FX FOMC & BoJ
Key quotes from the Societe Generale FX FOMC & BoJ report:
This morning’s Japanese policy story is that Japan will announce a fiscal stimulus package of ‘more than Y28trn’ with Y13trn in new fiscal measures. The reaction to the news ranges from hope to massive scepticism that all we will get is a set of existing spending measures repackaged to look impressive. The key is how much new bond issuance it leads to and speculation that Japan will start issuing 50year JGBs reflects the ‘hope’ side of the debate. The more debt-financing there is for easier fiscal policy the better for growth and the more of that spending that is financed by the BOJ buying low-yielding long maturity debt, the better too. The 10-30yr JGB curve sl.ope has steepened sharply in the last few weeks and the chart shows a spurious correlation with USD/JPY. More fundamentally, the 10year real USD/Japan yield differential is back up to 75bp. There’s more than enough uncertainty around about what policy measures will actually be taken but if we get a meaningful fiscal package, more BOJ bondbuying, and any kind of upbeat FOMC message, I think USD/JPY can get back to 110 over the summer.
Since the last FOMC meeting on June 15, the S&P has gained almost 5%, EM bond spreads have narrowed significantly, and while the dollar’s up, it’s gained less than 1% on a tradeweighted basis. ISM, employment, retail sales, new and existing home sales and core CPI have all come in above expectations, even if most of these weren’t spectacular. In another era, there would be massive pressure on the FOMC to raise rates but no-one expects anything from today’s meeting. Still, some acknowledgement of the improved economic backdrop is likely in the statement and the market will go on slowly raising the odds of a 2016 rate hike. The dollar will go on getting support as the whole treasury curve edges higher.
EUR/USD is getting stuck below 1.10. The EU/US real yield differentials that I like to watch caution against getting over-excited but where’s the fun in that? We get Eurozone M3 data this morning, but underlying private sector credit growth is stuck around 1% per annum. US durable goods order probably won’t move markets either
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