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.
Frequently Asked Questions about this Article…
The US Federal Reserve chose not to raise interest rates, aligning with market expectations. This decision was likely influenced by current economic conditions and aims to maintain stability in the financial markets.
The Federal Reserve's decision not to raise interest rates led to positive share market movements in the US. However, this may only have a muted effect on the Asia Pacific markets, especially with the Bank of Japan's meeting on the horizon.
A weaker Australian dollar could lead to international selling of bank shares, as the prospects for the AUD turn negative. This might put pressure on financial stocks, although it could be offset by strength in the commodity sector.
The Bank of Japan's decision is preceded by a range of economic data, including jobless rates, CPI, retail sales, industrial production, and foreign investment. This data could lead to currency volatility as traders adjust their expectations for potential economic stimulus measures.
Shorting Australian banks is gaining popularity due to elevated trading volumes in financial stocks and a weaker outlook for the Australian dollar. This strategy, known as the 'widow-maker' trade, is back in vogue as investors anticipate potential challenges for Australian banks.
Economists are divided on the need for an interest rate cut by the RBA. Some argue that low core inflation measures justify a cut, while others believe that despite low inflation, stronger growth and jobs numbers do not necessitate an immediate rate reduction.
The rising oil price is boosting commodity sentiment, supported by a weaker USD. This could lead to a mixed market, with energy and mining stocks receiving support, while financial stocks face pressure.
Currency volatility in Japan may arise from the release of various economic indicators, such as jobless rates and CPI, ahead of the Bank of Japan's meeting. Traders are recalibrating their expectations for potential economic stimulus, which could lead to fluctuations in the currency market.
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