Are central banks coordinating for a US interest rate hike on Sept 21?
Inaction by the European Central Bank (ECB) and Bank of Japan (BoJ) might be paving the way for the US Fed Reserve to raise interest rates on Sept 21 while dampening a potential USD surge.
The pronouncements coming from various Fed members suggest that they do want to raise interest rates and the chance of that happening on Sept 21 increased last week. Not least there’s a potential bubble inflating in US commercial real estate and the boom in auto loans appears to share some characteristics with subprime mortgages, which caused the last financial crisis.
But it’s far from a done deal on interest rates with markets throwing a tantrum on Friday showing how hard it is for the Fed to tighten without damaging confidence.
The Fed faces a number of problems. It wants to normalise monetary policy without sending the USD soaring hurting exports and creating the very deflationary pressures it wants to avoid. Also, a strong USD plays into populist politics, which could be toxic ahead of the US November elections.
Another more fundamental issue is that much of the economy is now addicted to cheap money, suggesting there might be many zombie companies being kept artificially alive, which dampens productivity and returns on capital. Many households have probably also grown used to cheap financing with little capacity to absorb higher interest rates.
But unwinding that could tip the economy into recession followed by job losses.
However, the restraint being showed by the BoJ and ECB on ratcheting up their aggressive monetary easing is likely to be temporary, despite suggestions that their policies are reaching exhaustion. The BoJ has talked about deepening negative interest rates, which it will probably do once the coast is clear. It holds a key meeting on Sept 20-21 just before the Fed’s and what it says and does will be very telling.
For the ECB it is more complicated – it’s policies are deeply unpopular in Germany, but can it afford to stop? If it did the EUR would soar deflation would entrench deeper and there’s a risk of peripheral Eurozone bond yields blowing out and endangering the currency union. Talk about being between a rock and hard place. ECB boss Mario Draghi is due to speak on Tuesday.
These conflicting dynamics leave the prospects for USD, EUR and JPY looking very foggy.
However, Sept 21 could turn out to be a trend setter for forex markets, regardless of what the Fed does and it all hangs on whether it finally pulls the trigger as it keeps threatening to do, almost to the point of disbelief.
TECHNICAL ANALYSIS: USD/JPY: Long-term trend still looks lower
Since mid-August, USD/JPY seems to have built a support base above 99.00, since rebounding to near-term highs of 104.32. But in the context of the longer-term trend, USD/JPY appears to be heading down making the recent up move a mere retracement of which there have been at least six since mid-December 2015.
Nonetheless, taking out the psychologically important support level of 100.00 could be a real battle, particularly with the threat of the BoJ looking to hold the line. Though many of its previous attempts at stemming JPY’s rise have failed, it can produce very choppy action.
At the moment the pair are sitting roughly in the middle of the Bollinger band with the daily RSI at very neutral levels. The very short-term bias for USD/JPY appears to be upward for the time being, but the real catalyst for a decisive move will be the BoJ’s meeting on Sept 20-21 and the Fed’s meeting on Sept 21 or any strong clues over monetary policy to emerge before-hand.
Potential clues could be contained in US data release on Thursday namely retail sales, PPI and weekly unemployment and US CPI on Friday.
Resistance is placed around 103.45, 104.32 and 105.37 and support 101.71, 101.20, 100.24 and 99.90.
By Justin Pugsley, Markets Analyst, MahiFX