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Bank of Japan Shocks Market

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As expected by most economists, the Federal Reserve completed its final asset purchases this month under its latest QE program. In line with forecasts, the final 15 Billion in purchases was reduced at Wednesday’s meeting. The FOMC statement showed only one dissenter in member Kocherlakota:

‘who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.’

The Fed caused no surprises by keeping the phrase:

‘it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program this month’

Which means that the Fed may be waiting for December’s FOMC meeting – where a press conference is scheduled to follow – in order to explain any wording changes. The statement also brushed off concerns over falling inflation expectations as temporary:

‘Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.’

All in all the statement was considered fairly hawkish, and markets reacted with US Dollar strength; the Euro fell more than one and a half cents after the release along with the AUD, GBP and NZD when measured against the USD.

US GDP surprised the market by coming in stronger than expected at 3.5% which significantly surpassed the expected 3.1%. Markets reacted counterintuitively to this by selling off the US Dollar, which may have been an artefact of the long USD positioning following the FOMC statement.

The RBNZ also kept things as expected by holding interest rates at 3.5%, while removing its tightening bias from the statement. Governor Wheeler also stressed again that the exchange rate remains unjustified and unsustainable despite recent falls.

In breaking news, the Bank of Japan today released its monetary policy statement and surprised the market by increasing its monetary base target to 80 trillion Yen – 10 trillion higher than the market was expecting at 70 trillion. The Yen is selling off dramatically in the aftermath, with USDJPY spiking over 100 pips higher. The Nikkei has also broke higher on the news.

USD/JPY:

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