This is a big week for data with the central banks of both US and Japan making interest rate decisions. As the Financial Times characterises it, you could think of it as yet another episode of the ongoing global currency wars, with a race to see which central bank can manage their currency down. Obviously it’s a zero sum game, as for one currency to weaken another needs to strengthen. It’s interesting to note that the FOMC will actually be on Wednesday with the BoJ following on Thursday morning, which should give the Japanese a chance to react to the decisions and statements made by FOMC officials. This becomes particularly relevant when Kuroda the BoJ governor recently pointed out that the Federal Reserve’s less hawkish stance this year might be part of the reason for the swift appreciation of the Japanese yen so far this year. No doubt the BoJ will be hoping that the more positive risk environment of the last few weeks will give the Federal Reserve the room to sound more upbeat about the US and global economies, and thus put interest rate rises back on the agenda. This would probably do as much to halt the collapse in USD/JPY than almost anything the BoJ will be able to do. I say this because explicit attempts to halt yen appreciation would not be politic given discussions between Japanese officials and their US counterparts in a recent meeting in Washington. Given Governor Kuroda’s ability to surprise market watchers it’s not surprising that this week will likely see a lot of volatility and perhaps it started on Friday’s (see chart below) big jump in USD/JPY. The fact that equities are just a bit softer at the start of this week is a further sign that some caution is creeping in before the big announcements.

Elsewhere EUR/USD has made lower lows and lower reaction highs which could be taken as a sign of an imminent decline, but I wouldn’t want to be the boy who cried wolf too often. At the very least the 1.1050 area needs to be breached before things get interesting in my view. For now the dollar looks to be in retreat, and only a significant change in FOMC opinions is likely to alter the short term trend in my view. I guess we’re all waiting to see what they say on Wednesday.

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