FX Pulse

OVERNIGHT

    The U.S. dollar ended broadly lower against all G10 peers after an initial BOJ-inspired rally quickly fizzle off and inaction by the Fed later on sealed the dollar’s fate, as what we wrote in yesterday’s publication.

    The BOJ introduced a new policy framework - quantitative and qualitative easing (QQE) with yield curve control - while keeping the policy rate unchanged at minus 0.10% amid for calls for an interest rate cut. Yield curve control refers to varying bond purchases such that the 10-year JGB yield will remain “more or less at the current level of (around zero percent)”. The BOJ also introduced more flexibility around the pace and composition of bond purchases, allowing some variation from the current pace of ￥80trn and scrapping the average maturity for JGBs guideline (currently at 7-12 years). The BOJ also scrapped the goal of meeting 2% inflation target in fiscal 2017 and replaced it with an “inflation-overshooting commitment” - continue expanding the monetary base until the 2% CPI inflation target is achieved and sustained in a stable manner.

    The FOMC held rates unchanged at 0.25-0.50% for the sixth straight time, as widely expected. For the first time in this rate hike cycle that begun last Dec, 3 regional Fed Presidents, Esther George, Loretta Mester and Eric Rosengren, dissented in favor of a rate hike. The dot-pot is also adjusted lower, with the median dot now only implying one 25bp rate hike (from two) in 2016 and two more (from three) in 2017. The policy statement echoed Yellen’s remarks at Jackson Hole last month, with the Committee “judges that the case for an increase in the federal funds rates has strengthened”, setting the stage for an eventual 25bp rate increase in the Dec FOMC meeting (still our base case).

    In all, USD/JPY was the most volatile within G10, initially higher by over ￥1 to 102.79 immediately after the BOJ decision but began to reverse lower during Kuroda’s press

    conference, added further losses when a lower dot plot sank the dollar, finishing 1.4% lower at 100.32. The commodity currencies within G10 managed good gains after the Fed reassured with an even more gradual rate of normalization, with AUD/USD rising for a third day, by 0.9% to 0.7624. EUR/USD and GBP/USD were more muted, only rising 0.3% each to 1.1189 and 1.3032 respectively.

    USD/SGD mimicked moves in the broad dollar, initially rising to as high as 1.3659 after BOJ before drifting lower as the day progressed and finally to be torpedoed by the FOMC to finish near session lows, at 1.3534, down 0.6% for the day. With this move, our long USD/SGD position also triggered the stops at 1.3550 overnight (see next page).