The FED and BoJ dominate an otherwise quiet week

20 September, 2016

Tom Arnold

This week is a relatively quiet one with only really two events of critical importance to trouble the markets – the Bank of Japan’s monthly policy statement and the US Federal Reserve’s policy statement.

In Japan interest rates are negative and a large QE programme is already in place, so the BoJ face a hard decision as to what to do next to help their economy to push on, and particularly to get themselves close to their inflation target. Their board are split on what to do with some members favouring extending the QE programme while others want to pull back from this policy entirely, and some calling for further interest rate cuts.

The Fed face a very different decision – they have pretty much confirmed that they will be raising interest rates once more this year, and now it is simply a question of when, with some analysts believing there is scope to do so as soon as this month, whereas others think later in the year is more likely. Janet Yellen and her committee have been very cautious over the last few months and so one might expect them to favour taking their time over jumping in, but recent comments have been Hawkish, so the decision is on a knife edge.

What does all of this mean for you? Not many Currency Index clients transfer Yen, but for any with currencies in the same zone it is also a critical decision from the BoJ. If Governor Kuroda and his team decide to cut interest rates further, then borrowing Yen becomes even more favourable and as such the “carry trade” will come to the forefront again. This is a trading system, where by a significant loan is taken in Yen (cheap to borrow), the Yen are then exchanged into a currency in a country where interest rates are significantly higher yielding (AUD, NZD, ZAR), and the funds are left there until the Yen loan needs to be repaid, at which point it is all reversed. If enough carry trading is done, then you can see a surge in strength for the higher yielding currencies as more investment is made in them – strength equals more expensive. So if you are looking to transfer money to Australia or New Zealand or South Africa in the coming days or weeks, then moving ahead of this decision could be critical.

With the Fed’s decision it is a bit more straight forward. If they raise rates, the USD becomes a more attractive investment (higher yielding) and so it will strengthen, making any USD transfers or transfers of pegged currencies such as UAE Dirhams more expensive.

So if you have an upcoming requirement in Dollars, be them Ozzie, Kiwi or Greenback, then make sure you stay in close contact with your Currency Index account manager to be kept informed of exactly what is happening, and remember you can also fix your rate in advance even if your requirement is not for some time, using a forward contract, or if you want to try and achieve a particular rate you could always consider a limit order over the policy announcements – particularly the BoJ’s announcement which is due overnight, i.e. when the UK markets are otherwise closed.