G10/Global reviewed - Nomura
Analysts at Nomura explained that the Fed minutes, BOJ exit policy, OPEC and Scandies USD/JPY had been the big mover in the G10 space last week, with the yen approaching the mid-September levels of 111.
"News flow in the US has not been particularly negative – durable goods were a little soft, and while the Fed minutes showed divisions among participants on the medium-term inflation outlook, there was little in terms of new information in the minutes. However, we still believe medium-term negative themes surround the dollar. The Fed remains content with market pricing being well below the DOTS, and a heavy legislative agenda risks tax disappointments and even a government shutdown as the budget deadline approaches.
There has also been increasing interest in the BOJ’s exit policy this week. Governor Kuroda’s comments on the “reversal rate” are increasing market expectations of an earlier BOJ tightening, but we do not think his comments suggest an immediate tightening. It is also worth noting that the JGB market remains stable, and a large majority of domestic investors do not expect a change in the government’s stance on deflation anytime soon. The BOJ leadership nomination is also approaching, and the BOJ may not want to irritate the government, as the Bank likely wants to avoid the appointment of a more radical candidate. As the market is becoming more focused on the possibility of BOJ normalisation, policymakers’ comments will be important for JPY in the near term. There will be many BOJ board members’ speeches scheduled over the next two weeks. In our view market expectations for the BOJ exiting its current policy are premature, and BOJ officials’ comments should calm the FX market, while the JGB market is already calm.
OPEC members convene in Vienna next Thursday (30 November) for their 173rd Ordinary meeting. Markets look to be anticipating an agreement between the parties to extend the oil production cap past Q1 2018. Signals and communications from various officials suggest the production cuts could be extended by about nine months, though the decision could be delayed until after the November meeting. Russia continues to show little urgency to make a decision until closer to March when the current cuts are due to expire. With an extension now looking well priced and net-long positioning at elevated levels, the reaction to the November meeting looks asymmetric, with risks tilted towards the market being disappointed."