Executive Editor Bess Levin. Our economics team continues to expect a rate hike in September, implying an adjustment higher in Fed pricing is likely in the weeks ahead. However, our position metrics suggest that, despite rate markets pricing additional BOJ action, currency market participants have actually been positioned long yen, apparently sceptical that further BOJ easing would succeed in weakening the currency.
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First, markets believe the Fed will be unwilling and unable to proceed with rate hikes over the next few months. Second, a perception exists that most other G10 central banks have exhausted most of their ammunition with respect to conventional policy easing, and thus are not likely to cut rates much further.
We agree primarily with market pricing for limited policy action from G10 central banks in the final months of the year. The table below compares our views with the current market pricing. Indeed, we think the rates markets may even be overpricing scope for the Bank of Japan to push cash rates lower, with the Bank of Japan more likely to focus on adjustments to its asset purchase program than rates policy at the September meeting.
Our main disagreements with market pricing as we head into the final months of the year relate to pricing for the Fed and Bank of England, with the former still likely to hike rates, in our view, and the latter expected to cut rates further.
Rates markets have been persistently unwilling to increase pricing for Fed hikes since June, despite a fairly steady stream of hawkish comments from officials and strong labour market data.
Our economics team continues to expect a rate hike in September, implying an adjustment higher in Fed pricing is likely in the weeks ahead. The Bank of England has had a run of upside surprises on key releases for August, and, as a result, the markets have scaled back expectations for further easing. Our economists expect data to be less robust going forward and still believes as its base-case scenario that the Bank is likely to deliver a further 15bp of rate cuts in November.
Market positioning has adjusted to reflect the shift in rate hike expectations for the BOE and the Fed, with cable short positioning recovering sharply from an extreme short position in July to only a modestly short position now. The short covering process could have further to run in the near term, but the lightening of positions should ultimately create opportunities for shorts.
Our view that Bank of Japan BOJ policy easing will likely fall short of expectations might suggest opportunities to go long yen in the months ahead. However, our position metrics suggest that, despite rate markets pricing additional BOJ action, currency market participants have actually been positioned long yen, apparently sceptical that further BOJ easing would succeed in weakening the currency.
You can get BNP Paribas Forex Weekly Strategy research reports as well as many other analytics from tier 1 institutions via our subscription. Our economists still expect a Federal Reserve hike in September. We remain broadly bullish on the USD. The market has interpreted recent Bank of Japan comments as reducing the likelihood of 21 September easing. G10 central banks at rest? Couple times a week for it to pay off.
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Executive Editor Thornton McEnery. Senior Editor Jon Shazar. Send Tips tips dealbreaker.