Bank of Japan Rethinks Policy Framework

Daily Analysis - 21/09/2016

Central Bank Leaves Rates On Hold, Keeping Monetary Policy Steady


The Bank of Japan announced a slew of fresh changes to its policy framework and decided to keep its benchmark interest rate on hold during its latest monetary policy meet that concluded on Wednesday.  After failing to meet the inflation target by 2015, the new measures are intended to meet yield curve targets which are to push down long-term borrowing rates to near zero.

EURJPY Jumps on BoJ Announcement

After much fanfare and anxiety, the Bank of japan announced its latest monetary policy decision, leaving its benchmark interest rate at -0.10% while refraining from adding to its existing quantitative and qualitative easing program.  The new steps undertaken by Japan’s Central Bank include its decision to make yield curve control the central yardstick of its new structure, eliminating the maturity range for bond purchases and abandoning the target to expand the monetary base by 80 trillion Yen annually. Furthermore, the BoJ stated that it would resort to buying 10-year JGBs to enable the yield to float around zero percent.  Following the outcome, economists now expect the bank to not just target asset purchases, but also keep an eye on bond yields, allowing greater flexibility with regards to the remaining tools available.  In response to the decision, EURJPY rallied to the highest point since September 16th before pulling back from intraday highs.


API Records Surprising US Crude Inventory Decline

Oil prices rallied on Wednesday, with the Brent gaining 1.30% to trade at $46.47 per barrel, following data from the American Petroleum Institute that showed US crude stockpiles unexpectedly fell by 7.500 million barrels for the week ending September 16th. Should the Energy Information Administration confirm this development in its own report due later in this session it would mark the third straight weekly drop in onshore oil inventories. Analysts surveyed by Reuters were expecting a stockpile build-up of 3.400 million barrels. Also adding to the positive sentiment were comments from the Russian oil ministry that pledged support to any potential output freeze deal between OPEC and other major producers.  Besides the momentum higher in Brent, West Texas Intermediate is also trending to the upside, with prices running into resistance at $45.00 per barrel.


Housing Starts Take a Plunge

Following the positive NAHB report earlier in the week, US housing bulls were met with disappointment after housing starts fell in August due to a deeper than anticipated decline in certain regions.  The noteworthy mention was the -14.80% slide in starts in the South to a 543,000 annualized pace. This was the steepest drop since October of last year. All the other three regions - the West, Midwest and Northeast - showed a pickup in activity.  Besides effectively offsetting improvements in other parts of the country, the latest data adds to a conflicting outlook for the homebuilding industry as a whole.  According to the report, new homes breaking ground fell -5.80% to an annualized pace of 1.142 million, from July’s higher revised 1.212 million rate.  Stocks were mostly lower on the session, with index futures only rebounding after the Bank of Japan announcement.


Pound Slides to One Month Low

UK Sterling fell to a one month low against the US dollar in early trade on Wednesday, hovering just below the psychologically key level of 1.3000. The exact catalyst for the decline was not immediately evident. On the contrary, a string of positive economic reports from the UK on Tuesday suggest that manufacturing and business confidence are rebounding.  However, some currency analysts attribute the Pound’s latest fall to the uncertainty related to the exact nature of UK’s European Union exit, as well as the tough stance taken by key EU politicians Guy Verhofstadt  and Jean Claude Juncker on any such deal.  Furthermore, with market participants cueing up for the FOMC rate decision later in the session, traders are starting to pare back risk in anticipation of another potential surprise from the statement as they seek to find clues about the path of rates for the remainder of 2016.


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