FX Focus - DXY: Attention On The BoJ, Fed And SNB This Week

This week sees no less than 10 central bank meetings with market’s overwhelming attention likely to be on 3 of those – (1) the 2-day Bank of Japan (BoJ) policy meeting (decision on 19th); (2) the 2-day Federal Reserve (Fed)  FOMC meeting (decision on March 21st); and (3) Swiss Nation bank (SNB) meeting on March 21st.

While there is talk the BoJ may delay tightening financial conditions to April, there is now overwhelming evidence for BoJ to shift at this week’s meeting instead. The evidence includes – (1) At least 2 members of the 9 member BoJ board (Nakagawa and Takata) think the BoJ’s longer term goal of 2% inflation is in sight; (2) JiJi press recently reports the BoJ may scrap its yield curve control (YCC) policy and revert to its pre-September 2016 program of a quantity target on JGB purchases while Nikkei news reports late last week that the BoJ is set to discuss ending negative rates for the first time since 2007 at this week’s meeting; (3) The BoJ’s absence from the stock exchange-traded fund (ETF) market early last week despite Topix falling more than 2%, a level seen as a trigger for BoJ to come in to support ETFs; (4) Confirmation that Japan’s largest union group Rengo has been successful in obtaining one of the largest pay deals averaging 5.28%, a figure that far outpaces the initial 3.8% tally of a year ago — itself the biggest in 30 years - higher real wages have been a key condition set by BoJ Governor Ueda to exit the current ultra-accommodative conditions; and (5) Revised business capital spending data shows Japan did not enter into a technical recession in H2’2023 after all while Japan’s producer price index (PPI - another inflation gauge) rises for the first time in a year. Together with higher-than expected Tokyo CPI, the picture seems to be one of stickier services inflation as businesses pass higher labor costs on in service prices. The BoJ is expected to not only end negative rates (NIRP) but set a new target range for its overnight rate (TONA) at 0.0 to +0.1%. It is also expected to abandon YCC by removing the soft upper limit on 10Yr JGB yields and 0% target and end ETF & J-REITs purchases as well as drop its guidance on expanding the money base.  However, BoJ will likely still maintain targeted JGB purchases and CP & corporate bond purchases for now.

Next comes the Fed FOMC meeting and while markets are increasingly pricing a more-hawkish Fed following stronger-than-expected US inflation data, Chairman Powell is likely to emphasize slowing YoY core PCE inflation and restate that the Fed is “not far” from achieving the level of confidence necessary to begin lowering rates. Most importantly, the FOMC’s median dot plot (an expression of FOMC members’ rate projections) is likely to be unchanged. The FOMC will also discuss balance sheet reduction in depth which might result in some principles being published on how the Fed plans to taper and then eventually end balance sheet reduction.