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Commentary Topic from greenfaucet

PPI and BoJ Provide Signal Upside Potential in USD/JPY

If you are wondering why the Fed did not remove the pledge to keep interest rates at an extremely low level for an "extended period" of time yesterday, just take a look at this morning's producer price figures. Inflationary pressures in the U.S. are extremely modest and the lack of inflation gives the central bank the flexibility to leave monetary policy easy for longer than otherwise. The Fed may not have had the PPI report in their hand prior to their meeting, but they would have seen the import price report which had already reported softer price pressures. Producer prices fell 0.6 percent in the month of February due primarily to a big drop in energy costs. Excluding food and energy, producer prices actually rose 0.1 percent. However, with oil prices increasing materially since then, the decline in PPI should be temporary. Therefore we still believe that at the end of the day, the Fed is closer to actually tightening monetary policy than its European counterparts. Furthermore, despite the hot employment numbers from the U.K. this morning, investors feel there is greater risk in putting their money in Europe than in the U.S. at this time. For this reason we are still bullish dollars, particularly against the Yen.

Another Reason Why USD/JPY Could Rise: Bank of Japan Increases Stimulus

Meanwhile, the big event overnight was the Bank of Japan announcement. The central bank doubled the size of their special lending program to 20 trillion yen, making them effectively the most dovish G7 central bank. Interest rates were left unchanged at 0.1 percent, but that did not stop the Japanese Yen from trading lower against all of the major currencies. Given that the central bank upgraded their economic outlook for the first time in 8 months earlier this week, their move was clearly an attempt to pacify government officials who have been on their backs to use monetary policy to jumpstart inflation. Not all members wanted to bend over backwards for the politicians however - for the first time since last October, Noda and Suda dissented. In a statement released after the monetary policy meeting, the BoJ said "Japan's economy is picking up, mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand." Shirakawa also said ""Showing the BOJ's clear stance against deflation will help ensure an improvement in the economy and prices." The question now is whether the BoJ's act will be effective in bolstering prices. The BoJ has increased the money supply, but this is not the real problem - the main issue is that Japanese consumers are not willing to take money out of their wallets and spend. Although the Japanese Yen did not have a big reaction because the announcement was not much of a surprise, it provides an additional reason why the Japanese Yen could extend its losses against the U.S. dollar.