The new Bank of Japan troika (Kuroda, Iwata, and Nakaso) held its very first press conference on Thursday. As expected, the trio reiterated their stance on monetary policy.
According to Kuroda, they will do everything in their power to overcome deflation, even if they have to push for unlimited monetary easing. In addition, he said that the current easing program being implemented is too weak, and that the BOJ could strengthen it even further in terms of both quality and quantity.
Kuroda’s words seem to suggest a high possibility of a QE expansion, as well as the purchasing of risk assets and Japanese Government bonds with longer maturity dates.
There has also been speculation that the BOJ could hold “special meetings” where it could make snap decisions on monetary policy to assure that the 2% inflation goal is achieved.
Despite Kuroda’s pledge, the 2% target will probably not be reached any time in the foreseeable future. The 20% depreciation of the yen against the dollar is estimated to add only 1% to the headline inflation rate and 0.3% to the core rate.
There is also a significant sales tax hike that will be implemented in Q2 2014 that could weigh heavily on consumer demand for goods and services (and in turn, put downward pressure on prices).
Although USD/JPY has the potential to surge to 100.00 by some time 2014, I see it simply hovering at current levels (94.00 – 97.00) in the next couple of months.
The fact is, much of Kuroda’s dovishness has already been priced in by traders, so it will take another big surprise from him to actually trigger an upside breakout. However, I believe that there is a small risk that USD/JPY could fall, possibly towards the 91.00 level, if Kuroda’s additional monetary policy easing disappoints expectations.
The British pound has been performing quite well lately as traders have been cutting back on their bets that the BOE will engage in another round of asset purchases. If you recall, the most recent BOE meeting minutes revealed that policymakers were getting slightly concerned about the value of the pound. The minutes said that further QE could lead to an “unwarranted decline of the sterling.”
Another factor that’s preventing the BOE from easing is the high inflation rate. It currently stands at 2.8%, much higher than the central bank’s 2% target.
For now, it appears that it’s going to take a substantial decline in the U.K.’s economy for the BOE to increase its quantitative easing program in the next few months. Do note, however, that Mark Carney is set to replace incumbent BOE Governor Mervyn King in July.
Needless to say, it could be a major game changer and result in sudden changes to the central bank’s monetary policy. But I guess we’ll just have to wait and see what Carney actually brings to the table.
GBP/USD will probably continue to find support over the next couple of weeks as traders pare back bets on further easing. The pair will have a difficult time piercing 1.5270 though as U.K.’s economy is still pretty frail.
It appears that Bernanke, along with his colleagues, do not believe that altering the CURRENT monetary policy is appropriate at this time. This was clearly seen in the most recent FOMC statement, where the Fed chose to make no changes to both the benchmark interest rate and its $85 billion per month open-ended quantitative easing program.
However, the Fed’s statement regarding FUTURE monetary says something else. According to Bernanke, the Fed could “calibrate the amount of accommodation” in the future, which basically suggests that there is a possibility that the central bank could actually tighten monetary policy if economic conditions continue to improve.
In a world where close to zero interest rates and unconventional stimulus measures is the norm, being one of the first central banks to hint at tightening monetary policy that its domestic currency may rise in value.
That being said, we could see the dollar gain even more ground in the next couple of months, but maybe only after the bulls get some rest.