Fed, BoJ, Cuts, Currency

The US Federal Reserve overnight declined to lift interest rates, in line with market expectations. However, the positive share market moves in the US following the decision may produce only a muted echo in the Asia pacific morning session ahead of the Bank of Japan’s meeting today. In Australia, investors are focussed on the potential for an interest rate cut at next week’s RBA meeting, and potential for international selling of bank shares as the prospects for the AUD turn negative. These potential drags on the market may be somewhat offset by further commodity strength overnight.

An avalanche of data precedes the BoJ decision, with the release of jobless rates, CPI, retail sales, industrial production and foreign investment among others. This may see early session currency volatility as traders re-calibrate current expectations for “extraordinary measures” to stimulate the Japanese economy.

Elevated trading volumes in financial stocks yesterday suggest the “widow-maker” hedge fund trade of shorting Australian banks is back in vogue, triggered by a weaker outlook for AUD. Debate rages among economists this morning following yesterday’s weak read on Q1 inflation. Some argue the low core inflation measures demand a cut, others that low inflation leaves the door open but is not sufficient in light of stronger growth and jobs numbers.

A rampant oil price is lifting commodity sentiment generally, aided by a weaker USD. This could mean a highly variegated market today, with support for energy and mining stocks contrasting with pressure on financial stocks.