June is gearing up to be an important month, with a host of key events taking place that will set the risk tone for the remainder of 2016.
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Following in the steps of the European Central Bank, this week has seen the Federal Reserve and Bank of Japan take a "wait and see" attitude also, leaving the market to wait until June, when the big three central banks next announce monetary policy decisions.
The ECB set the tone last week, saying "The focus is now on the implementation of the additional non-standard measures decided on 10 March 2016," thereby making clear that the central bank wants to see how the current measures work before easing further.
Yesterday, the Federal Reserve kept short-term interest rates unchanged as expected, "but gently modified its policy statement in a way that could begin the process of preparing financial markets for another modest rate hike in coming months," said MNI Fed Watcher Steve Beckner.
The Fed statement "gave no indication when a second rate hike will come, while reiterating that additional rate hikes will be 'only gradual,'" he said.
"However, in what could be seen as a tentative, conditional step toward further monetary tightening, the FOMC softened its previous expressions of concern about "global economic and financial developments," Beckner added.
Of the three central bank decisions, the BOJ's announcement that policy would remain steady disappointed market players the most, as evidenced by a 3.61% decline in the Nikkei 225 and a sharp tumble lower in dollar-yen.
Many in the market expected the BOJ to announce some, if not all, of the easing measures put forward by analysts.
These expectations included a doubling of ETF purchases, lowering the negative interest rate on excess reserves further, implementing a negative rates on lending facility, and increasing the monetary base expansion from Y80 trillion, to name a few.
Even market players who had looked for new BOJ easing measures only in June, were somewhat swayed by recent comments from BOJ Governor Haruhiko Kuroda, who hinted at, but did not promise, further easing.
In the press conference Thursday, Kuroda repeated that the BOJ will not hesitate to ease again if necessary.
"I don't think there is a limit to monetary policy," he said. See MNI Main Wire at 7:16 am ET for details.
Looking ahead, the various June events were viewed as potential landmines, able to sway risk sentiment in either direction.
On June 2, the ECB will hold its next monetary policy meeting and the same day, OPEC will hold its annual meeting. Both will be held in Vienna.
The Fed decision will be June 15, with the BOJ decision one day later on June 16, with back to back meetings just as in April.
The BOJ decision earlier roiled Asian markets and set a risk-off tone for financial markets overall Thursday, although a later run-up in oil prices to new five-month highs served to offset this.
Ahead of the Golden Week holiday, which begins Friday there is concern about liquidity and potential for volatile swings in dollar-yen.
The official Japanese holidays are April 29 and May 3-5, but many take the entire week off, leaving the market with one less risk gauge, i.e. the Nikkei 225, to look at.
In the near-term, data will drive, with the market especially keen to see next Friday's U.S. non-farm payroll release along with key China PMI and FX reserve data also due out next week.
In terms of other things that could roil, the Treasury report to Congress on International Economic and Exchange Rate Policies was due April 15 and should appear on a late afternoon as soon as late this week.
Reporters are particularly on the lookout for any change in calibration toward Japan, where the currency has become much more volatile since it began to surprise analysts by appreciating when prospects of more quantitative easing would ordinarily have weakened it.
So while no findings of currency manipulation are expected against any country, Japan is seen as a more likely target of firm Treasury counsel than China this time around. See MNI Main Wire at 1:20 p.m. ET for details.
Earlier this week, the U.S. Treasury Department confirmed that U.S.-China Strategic and Economic Dialogue talks will be held in early June in Beijing, although the exact dates were not yet made known.
Unlike the volatility seen in early 2016, China's currency has been much becalmed in recent months, which has contributed to the more positive risk tone in the market.
The People's Bank of China intervened heavily January 12 in order to narrow the spread between the on-shore and off-shore yuan.
The first week in January, the CNH-CNY spread widened to as much as +1,400 pips, as speculators entered into CNH shorts on expectations of a higher USDCNY.
This forced the PBOC to intervene, as one of the conditions of the yuan's entry into the IMF's SDR basket was to close the gap. The CNH-CNY spread has narrowed markedly subsequently, reflecting overall improved risk appetite.
Thursday's CNH-CNY closing spread (at 11:30 pm local time) was +115 pips versus +105 pips Wednesday.
On April 7, with risk aversion rising, the spread was +218 pips, the widest since early February. At the recent peak of risk appetite, seen March 18, the closing spread was -100 pips.
In contrast, dollar-yen has been especially volatile in 2016. The pair, which closed at Y120.22 on Dec. 31, 2015, saw a spike to Y121.69 on Jan. 29, the day the BOJ announced new easing measures, which included a negative interest rate on excess reserves held by banks.
Dollar-yen initially firmed in response to the BOJ move, but subsequently tumbled, hitting lows near Y107.63 on April 11, partly on jitters about Japanese Government Bond yields moving more negative out the curve and partly on the market pricing in fewer Fed rate hikes in 2016.
From 2016 dollar-yen peak to trough, seen as the BOJ eased, the yen has risen by 11.6%.