In the coming months there will be high impact news from central banks regarding interest rates and quantitive easing programs which could have a significant effect on FX markets. The Swiss National Bank and Bank of England are due to reveal their monetary policy decisions this week. The broad market consensus is that both will keep their policies stable to what is expected. The most anticipated decision will be by US Federal Reserve and the Bank of Japan whom are scheduled to announce their decision on September 21.
The most recent comments from members of the US Federal Reserve and Bank of Japan have provided mixed statements which have provided the broad market with less predictability in their decision. The market’s view of the probability of the US Federal Reserve rate hike has continued to dip below 22% from last month’s 68%. Lately members of Federal Reserve speeches have given diverse messages to the position and perspective of their monetary policy. Some members have continued to be Hawkish and argued for a rate hike sooner, whilst others have been Dovish and not considering a rate hike this year. The most recent speaker, Federal Reserve Governor Lael Brainard announced on Monday a more cautious position and therefore is against a rate hike this year. This was the last speech from the Federal Reserve known as the quiet period before the decision. Additionally there has been speculation that a rate hike is unlikely due to the presidential elections in November.
The Bank of Japan has reported recently they were considering more monetary easing and further cutting into currently negative rates. Markets have been doubtful and resilient to the most recent developments and consensus is it is unlikely the Bank of Japan will take this action. Market participants have continued to strengthen the yen when Bank of Japan previous statements have expressed further quantitive easing as a possibility much to the Japanese officials anguish. Additionally there has been speculation that the Bank of Japan are using these statements to weaken their currency as they have exhausted all their stimulus options.
Therefore the market consensus is that both the US Federal Reserve and Bank of Japan are unlikely to change interest rates and monetary policy. If this outcome takes effect, there should be a continuation on the US dollar and strengthening of the Japanese yen. If this plays out as expected the currency pair to trade would be USD/JPY with broad expectation of a downtrend. The “value” trade with potentially the largest volatility opportunity, would come if we see the US Federal Reserve increasing rates and Bank of Japan adding additional quantitive easing measures with perhaps a further negative rate cut. This outcome should be strengthen the US dollar and weaken of the Japanese yen considerably.
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