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She said: “most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”
As her speech occurred during the ‘twilight’ hour where there was a lull between US markets and the Asian session, only the currency markets were opened. Market participants perceived her overall tone as hawkish, and bid up the USD. The dollar index jumped above 96.0. This kept other major currencies under pressure. USD/JPY rose beyond 120 while EUR/USD weakened under 1.12.
Asian FX would come under similar pressure on a recovering dollar, but outsized movements are unlikely to take place ahead of the weekend. We would receive more clarity on the view of global markets when European and US trade take place. Their reaction will affect Asian markets only next week. Meanwhile, the SGD depreciated to mid 1.42 per dollar.
The Nikkei 225 opened on a stronger note, jumping over 1%. While much of this could be short covering from yesterday’s tumble of 2.8%, it could also be indicative of a view that the Yellen’s speech is supportive of risk appetite.
However, I feel it is more likely that expectations of more BOJ action as well as JPY pullback are behind the positive opening trade. CPI data continues to show a weak acceleration, which suggests that the Japanese central bank may need to do more. That said, the BOJ’s massive ¥80 trillion QQE programme is showing signs of crowding out the Japanese Government Bond (JGB) markets.
The ¥6.7 trillion per month purchases of JGBs represents more than 45% of the bonds issued to the market. At the end of June, the BOJ held a record ¥295 trillion of outstanding JGBs, which represented 28.5% of all outstanding debt. Even with this aggressive pace of asset buying, it is still nowhere near its 2% inflation target.
Admittedly, the weak global oil prices are dragging down consumer prices, which have been an issue with economies looking to boost inflation, including the European Union and the US.
If the BOJ cannot increase its asset purchase programme, it will have to explore other options, such as cutting the reserve requirement ratio, or expand its sovereign bond purchases to regional bonds.
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