Watch out for snippet of major attention on central banks’ season

Central banks will remain center stage this week and Wednesday will be a particularly busy day with Chair Yellen delivering her semi-annual testimony to Congress.

Today, at the start of the week it was sufficient for BoJ governor Haruhiko Kuroda to underline once again that the central bank was willing to continue this approach for JPY to ease again. Sometimes it really is surprising how long it takes the market to realize things. Or does the exchange rate reaction simply illustrate how skeptical the market is about JPY these days? Certainly, JPY shorts are very popular amongst speculative investors these days. We would not bet on a recovery in JPY yet.

The BoC potentially hiking rates and the BoK slated to remain on hold, despite recent hawkish overtures. Well, all eyes will be on Canada this week to see whether it becomes the first G7 central bank to follow the US Federal Reserve to raise interest rates. According to forward rates, the markets are currently attaching around an 85% probability to a quarter-point increase in its key policy rate – to 0.75% – although economists are more divided. If the Bank of Canada pulls the trigger, it would be a further important sign that the global rate cycle is on the turn.

BdF Governor Villeroy de Galhau said “In the future, and this will be our decision next fall, we will go an adapting the intensity of the monetary policy”, as per the Bloomberg interview on last Saturday. Amidst these more hawkish tones, the BoJ is the one major central bank that remains resolutely dovish.

As the Bund broke above 0.5% last Thursday, the BoJ promptly announced unlimited bond purchases to quell the spillover from the global tightening debate. The move sent both JGB yields and the yen lower.

In the countdown to the next policy meeting announcements from the ECB and BoJ 20 July, we contrast the inflation dynamics of the two economies. Balancing the various factors, we find that the inflation gap between the euro area and Japan may soon reverse trend and narrow.  While European bond yields surge as ECB leaves the door open to future tapering.

Stubbornly low inflation is an issue that the major central banks around the world continue to grapple with. In the case of the BoJ, however, the picture is proving particularly challenging with core inflation having slipped back to zero. The BoJ will release its next quarterly outlook in July and consensus is that the FY17 inflation outlook of 1.4% will be lowered.