USD/JPY to Head Higher on Policies Divergence

Fed surprised the market by showing confidence to tighten policy further, buy USD/JPY?

Fed maintained their forecast for another interest-rate increase this year and indicated three more hikes are likely in 2018. Most importantly, Fed said they will begin their balance sheet reduction in October, as recent hurricanes may not have long-term impact on the economy.

• The message is clear. Fed would like to continue to tighten its policy. Before FOMC meeting, market was only pricing in one rate hike by the end of next year.

• FOMC meeting overnight may provide a boost for USD as markets priced in a higher chance of a December rate hike; probability seen by markets is rising to around 70%.

• Fed Chair Janet Yellen said US economy was robust enough to withstand further rate increases and reduction in Fed’s $4.5 trillion balance sheet.

• For the trading flow, dollar dropped to a fresh low versus several peers just as the decision was announced, only to reverse sharply as markets assessed the overall tone of the statement to be more hawkish than anticipated.

• Bank of Japan maintained 10-year JGB yield target at about zero percent after policy meeting on Thursday. Yen fell to a two-month low against dollar amid expectations on policies divergence as Bank of Japan stood pat with its monetary policy.

• Spread between US-Japan 10 year sovereign bonds yield widened to 155 bps, the most since March. Take note USD/JPY spot rate was near 114.50 at that period. Based on this, the pair may have scope to move towards this level.

 Source : Bloomberg