Forex Weekly

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Pier-Luigi Bonelli Foreign Exchange Advisor
José-Manuel Luna Foreign Exchange Advisor
Ugo Biancaniello Foreign Exchange Advisor

The Bank of Japan kept monetary policy steady and roughly maintained its ambitious price forecasts on Tuesday, pointing to signs of growing strength in the economy that policymakers hope will accelerate inflation towards its elusive 2 percent target. Board newcomer Goushi Kataoka made no proposal on additional easing; defying market expectations he might do so after dissenting to last month's BOJ decision to keep policy steady. But he said the central bank should make clear its readiness to expand stimulus again and commit, via its bond purchases, to keeping the yield on longer-term bonds low. As widely expected, the BOJ kept intact a pledge to guide short-term interest rates at minus 0.1 percent and the 10-year bond yield around zero percent by an 8-1 vote. Kataoka dissented to the decision to stand pat. (Reuters)

US FOMC statement does little to alter view that a December hike remains quite likely. The description of growth was upgraded to note that it has been "solid," the first time economic activity was described in this manner since early 2015. The hurricanes were observed to have disrupted the employment numbers, though the labor market continues to be characterized as strengthening. Core inflation was noted to have "remained soft," though this looks to us like a factual description of core inflation which was unchanged on a 12-month basis between August and September. Relative to the September statement, there were no real changes to the description of the economic outlook or the risks to that outlook, nor were than any alterations to the statement’s forward guidance regarding interest rates.

Bank of England Governor Mark Carney has pulled a major prop from underneath the value of the pound by slapping a dovish line on the first interest-rate hike for a decade. Carney dashed hopes that a tightening cycle had started. An important culprit here was the notable omission in statement of language that appeared in policy makers' September policy decision that rates may need to raise more than the market anticipates. A market measure of expectations for interest rates a year from now dropped 10 basis points after his appearance, suggesting bets for only one rate hike before the end of next year. A third increase is all that is further priced in over the bank's three-year policy horizon. That would put the bank's key rate at 1 percent by the end of 2020