Yen Soft After BOJ, BOE And ECB Next

Yen remains soft in tight range after BoJ left policies unchanged as widely expected. Interest rate was held at near zero level while the central bank also maintained the annual pace of monetary base expansion at JPY 60-70T. In the accompanying statement, BoJ noted that the Japanese economy is "recovering moderately", with exports, business fixed investments picking up. In particular, BoJ noted that pick up in housing investment "has become evident". It also noted that inflation expectations "appear to be rising on the whole". BoJ is optimistic that the economy will continue a "moderate recovery" with CPI likely to rise "gradually". Again, Kiuchi proposed to change the 2% inflation target to a medium-to-long term gong but was voted down 8-1. Technically, yen remains the weakest currency this week and dropped most against the rebounding Aussie and Kiwi. There is no sign of bottoming in the Japanese currency yet and more downside is in favor.

Released overnight, Fed's Beige Book report showed that economic activity expanded at a moderate to modest pace across Fed districts. Employment markets held steady or improved slightly in general while wage pressure remains modest. Consumer spending improved mostly even though some districts reported that consumer remained cautious and price sensitive. Manufacturing expanded modestly on strength of auto, housing and infrastructure. Real estate activities also increased moderately. A point to note is that the report mentioned rising interest rates had mixed impact in loan demand in different districts but overall impact was limited.

Minneapolis Fed Kocherlakota said that FOMC's forecasts "suggest that it should be providing more stimulus to the economy, not less." And indeed, he said FOMC is "failing to provide sufficient stimulus to the economy" based on current outlook of inflation and unemployment. On the other hand, San Francisco Fed Williams said that the plan laid out by Bernanke regarding asset purchase is the "best course forward". That is, Fed should taper the $85b per month purchase later this year and end it in mid-2014. Williams noted that US is "getting closer to meeting our test of substantial improvement in the labor market."

Regarding Syria, the US Senate Foreign Relations Committee backed President Obama's request to strike Syria yesterday. The aim would be to "change the momentum on the battlefield'' in Syria's civil war and speed a negotiated removal of Assad. Use of ground forces, though, will be banned and there will be a 60-day limit for the strike, with a possible 30 day extension. Obama is expected to make his case to Congress when he return from Europe to Washington next week.

Looking ahead, BoE and ECB decisions will be the major focus today. BoE had made clear that it will keep rates at record low of 0.5% until employment drops below 7% level and that would not happen before 2016 based on the latest forecast. While further expansion in asset purchase cannot be ruled out, it's highly unlikely based on recent strings of strong economic data. In particular, the PMIs released this week had been impressive. BOE will keep rates unchanged at 0.5% and asset purchase target at GBP 375b today and issue only a brief statement. ECB is also widely expected to leave rates unchanged at 0.5% today. Draghi had already given his forward guidance that rates will stay at current level for an extended period of time, meaning more than one year. Today's announcement and press conference might be a non-event.

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Economic data to be released from US could be more market moving. ADP employment report is expected to show 180k growth in August. ISM services is expected to drop slightly to 55 in August. US will also release jobless claims, non-farm productivity and factory orders.

Written By: ActionForex