FX Week Ahead: FOMC and BoJ meetings

Fed to start balance sheet normalization

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The central bank monetary policy meetings continue to dominate another week, this time with the FOMC and the BoJ meetings. The Fed is expected to meet on Wednesday where it is all set to announce its balance sheet normalization program. No changes are expected to interest rates at this week’s meeting, but the press conference held by Janet Yellen later could offer the markets some insights into the Fed’s view on rates.

The BoJ will be another central bank meeting, but it is likely to be a non-event with the likelihood of being overshadowed by the Fed’s meeting. Inflation will be a key point of focus for the BoJ officials with expectations mounting that the central bank will push back its inflation forecasts once again.

Elsewhere, the Norges Bank will be meeting on Thursday as well. The interest rates are expected to remain steady at 0.5%. The central bank will also be releasing a new monetary policy report.

Here is a brief recap of the main events that will shape the currency markets this week.

FOMC: Fed to start balance sheet normalization

The week ahead will see the FOMC meeting on Wednesday. The monetary policy meeting will also be followed up by a press conference. The Federal Reserve is widely expected to start its balance sheet operations at this week’s meeting. The short-term interest rates are however expected to remain unchanged at 1.25%. However, with recent uptick in consumer prices, it could push the Fed to acknowledge that consumer prices are rising. Still, officials are expected to give a guarded response.

The main topic will, of course, be the balance sheet which has ballooned to over $4 trillion during the Fed’s QE operations after the 2008 global financial crisis. The central bank is expected to slowly unwind its balance sheet by letting the Treasuries, and the Mortgage-backed securities (MBS) to mature.

So far the central bank has been reinvesting the proceeds, but that is expected to end. The Fed will begin with a monthly reduction of $10 billion which comprises of a mix of both the Treasuries and the MBS. The size of the reduction is expected to rise by $10 billion every three months, eventually reaching $50 billion by late next year.

With the normalization, the Fed expects to shrink its balance sheet over the next few years. The Fed could also signal its intentions on the interest rates at this meeting with the markets still divided on whether the Fed will be able to proceed with another rate hike this year.

Bank of Japan expected to remain on the sidelines

The BoJ will also be meeting for its monetary policy meeting on Thursday, just a day after the Fed’s meeting. No major changes are expected from the BoJ at the September monetary policy meeting. The central bank’s QE purchases of 80 trillion yen and interest rates which are at -0.10% are expected to remain steady.

There is also the possibility that the BoJ could once again look towards pushing back its inflation target expectations. Consumer prices in Japan have remained stubbornly low despite consumption showing a rebound.

With inflation hardly moving, expectations are mounting that the BoJ could cut the inflation forecasts when the quarterly review is released during the October BoJ meeting. Following the BoJ’s meeting, the governor, Kuroda will also be holding a press conference. Recent GDP data showed that Japan’s economy expanded at a pace of 2.5% annually during the second quarter. This was mostly due to a pickup in exports as well as consumption. However, consumer prices (core) were seen rising just 0.5% in July on an annualized basis.

The BoJ had previously signaled that inflation could reach the target of 1.1% by March 2018, which is also likely to be reached.

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