Yen skyrockets after BoJ remains unmoved, Dollar slumps on Dovish Fed

No easing, no Yen relief. This is the message markets are trying to send the Bank of Japan (BoJ) after the central bank refrained from easing monetary policy.

Deposit rates remained at -0.1% and the annual pace of its asset purchase program was held at ¥80 trillion. Although the decision was widely anticipated by markets, some believed that BoJ could have surprised the markets, if not through lowering deposit rates then through increasing its scale of purchasing ETF’s or JGB’s. USDJPY broke immediately below two key support levels of 105.52 (May Low), and psychological support of 105 to trade at its lowest level since September 2014. With lot of pessimism in markets, the 100 level could be next on traders’ radars.

A soft US labour market and uncertainty over the UK’s referendum on June 23 has kept the Federal Reserve on hold for the fourth meeting in a row. The most watched dot plot used by the Fed to provide projections on interest rates path continued to see its dots slipping down, and although the door was kept opened for a rate increase in next meeting, the cautious speech by Chair Janet Yellen pulled back markets’ expectations for July hike to 7%, and less than 30% chance for September. All in all, the meeting was more dovish than what markets anticipated.

Here are the key takeaways from the Fed’s meeting:

• The decision to keep rates on hold had no dissenting votes as compared to past meetings.
• The Fed still sees two rate hikes in 2016.
• However, 6 of the 17 members forecasted only one rate hike this year.
• Rate hikes for 2017 and 2018 have been scaled back by 25 and 62.5 basis points respectively.
• Economic growth forecast cut for 2016 and 2017.
• Core PCE inflation forecast revised higher for 2016 and 2017 but will only reach 2% in 2018.
• “Improvement in the labour market has slowed while growth in economic activity appears to have picked up.” This is completely the opposite when compared to April’s statement.
• Brexit is a serious risk to the U.S. economy.

The dovish stance prompted bond rally and USD selloff, meanwhile it seems only a matter of days until yields on 10 year notes test a new record low. Two major factors could provide another leg to the bond rally, one is the flight to safety in such an uncertain time, and the other is that there is no attractive alternative, with $10 trillion of worldwide bonds’ yields in negative territory.

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Sayed is the chief market strategist at FXTM