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FX Primus Ltd.

May 27, 2014 03:08 ET

FXPRIMUS Market Brief of the Week: Yen Has Yet To Weaken On an Unknown Federal Reserves (Fed) Policy Direction

SINGAPORE, SINGAPORE--(Marketwired - May 27, 2014) - In FXPRIMUS' Market Brief of The Week for 26 May, the brokerage firm's Senior Economist, Jimmy Zhu talks about how Central Banks is the masters for rhetoric.

Economic Insights

Fed's monetary policy direction may finally gain attraction again in second half of the year, after the "tapering saga" in 2013 ends.

Data flow is very light this week. Nothing much is worth to read besides a few speeches from some central bankers such as European Central Bank (ECB) Draghi and Bank of Japan (BOJ) Kuroda. Besides that, U.S. 1Q Gross Domestic Products (GDP) is likely to be revised to a negative number; but it won't bring any tension as the bad weather itself is a good reason for that to happen.

Central banks are the masters for rhetoric, but investors have already gotten used to it, no matter if it's from the ECB or Fed. In second half of the year, the focus will be on the forward looking policy direction, instead of that of rhetoric only with a short term effect.

Last week, the Federal Open Market Committee (FOMC) minutes showed that Fed policy makers are weighing options for an eventual exit from the extraordinary easing, said that continued stimulus to push unemployment lower doesn't risk sparking an undesirable jump in the inflation rate. It tells us that the Fed may be starting to look for the strategies for a "tightening" without risking a volatility surge. Clearly, the Fed wants the process of tightening on an extremely gradual pace. U.S. Treasuries' Yield Curve is almost flattened compared to the previous week, and even less steepening than a month ago.

To view Figure 1, please visit the following link: http://media3.marketwire.com/docs/948241-F1.pdf

Dollar index edged higher last week, but it continues to have the difficulty to stabilise the uptrend when the Treasuries' yield remains relatively low. A lower euro on ECB's easing speculation also contributed to strengthen the Dollar index due to their consistently high negative correlations.

To view Figure 2, please visit the following link: http://media3.marketwire.com/docs/948241-F2.pdf

Life won't be easy for BOJ. Three of BOJ's nine board members wanted to rewrite the board's growth and inflation outlook in three different ways, with one urging a closer watch on downside risks, as shown in the minutes of the bank's April 30 policy meeting released on Monday.

Takahide Kiuchi and Takehiro Sato repeated their objections on the outlook that inflation will be raised to and anchored around 2% in about two years from April 2013, when the BOJ began the current aggressive easing. But Sato disagreed on the outlook of that inflation and thinks that it "is likely to follow a rising trend again from the second half of this fiscal year." He rejected the board's assessment that said the risk are "largely balanced" and proposed that they are "somewhat titled to the downside." His proposal was voted down by the rest of the board.

For his part, Kiuchi continued to propose that the BOJ should maintain the high degree of easing only during the two-year period from April 2013 so that it is not overdone. But his proposal was again voted down by the rest of the board. Sayuri Shirai disagreed on the timing for reaching the 2% target that the year-on-year rate of increase in the Consumer Price Index (CPI) is likely to "reach around 2% around the middle of the projection period." She proposed that the target would be achieved toward the end of the projection period through March 2017. Her proposal, like the others was also voted down by the other board members.

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