A slightly risk-on start to the day following on from the Bank of Japan rate decision and China’s return to the markets following their 2-day bank holiday. China has added slightly more liquidity into the markets ahead of the Evergrande coupon payments due tomorrow, but the main focus will be tonight’s FOMC meeting conclusion.
Today’s London open has started well for the risk-on sentiment. China has come back from its mid-autumn festival and the PBOC set their prime rate at market expected levels. The central bank also propped up their money markets adding CNY120 billion in reverse repose, but this has had little effect on the USDCNH price action. China’s Evergrande main unit Henga Real Estate will be able to make the interest payments for the onshore bonds due tomorrow and we must sit tight and see if they can make the US dollar-denominated coupon payment that is valued at $83.5 million.
The Bank of Japan once again kept its policy rate unchanged at -0.10%, The Bank decided, by an 8-1 majority vote, to set the following guideline for market operations for the interesting period. The BoJ also decided to purchase a ‘necessary amount’ of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent. Japan's economy has picked up as a trend, although it has remained in a severe situation due to the impact of COVID-19 at home and abroad. Because of these disruptions, the BoJ will continue with Quantitative and Qualitative Monetary Easing (QQE) with Yield Curve Control, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. The USDJPY caught a bid and the Nikkei225 remains the only major index to be trading lower this morning. On the daily chart above for the USDJPY the 200-period ema is offering dynamic support as price action coils around the median line of the year's price action range.
The main story today for the markets will be centered around the FOMC meeting this evening and the US dollar is likely to remain around current levels until we hear from Chair Powell. Today’s press conference will be even more interesting as there are calls for FOMC members to step down after it was reported several of them including Powell had traded very well during the pandemic netting millions of dollars in profits. A more dovish FOMC today and I see the US dollar index dropping down to the neckline support level of the possible H&S pattern. A mention of tapering will no doubt see the US dollar blast through the recent swing highs towards $94.50- $95.00.
Something to watch over the coming days is how well silver reacts to the market uncertainties, as a weaker dollar could give the buyers of the precious metals reason to stack more. Silver is trading off the lows of the current range, which is looking more likely to be an accumulation period rather than a distribution pattern. The risk to reward is certainly in the long favor but traders should be guided by the actions of the Fed.