Japanese Government Open to a Further Decrease in Negative Rates

XM Investment Research Desk: Markets were subdued as caution set in ahead of the highly-anticipated policy decisions from the Federal Reserve and the Bank of Japan following a two-day meeting that concludes on Wednesday.

The yen was weaker today as the Tokyo equity markets were up while investors count down to the BoJ decision and there is optimism that the Bank will take some action at this meeting. Unlike the Fed, a move on rates by the BoJ is expected and the odds for a rate cut have been getting higher recently, especially after some news reports and comments from BoJ officials that suggested the Japanese government would be open to a further decrease in negative rates in order to stimulate the economy.

The dollar was little changed against the yen during the Asian session, edging up to a high of 102.05 yen but mostly remained below the key 102 yen level and touched a low of 101.74.

Markets are pricing in a 1 in 5 chance that the Fed raises interest rates by 25 basis points on Wednesday. While the overwhelming consensus is for the US central bank to hold rates steady, investors are looking to see if the Fed will give clearer hints on the timing of the next rate hike, which many expect to be in December.

Gold, which is sensitive to interest rates and monetary policy expectations, was up in Asian trading to $1,316.31 an ounce. There is some demand for the safe haven asset as traders are being cautious in case of a surprise Fed rate hike tomorrow. However, gold is down on the month and has wiped out this quarter’s gains as there is growing speculation that the Fed will hike rates by the end of this year.

The Australian dollar spiked up after the Reserve Bank of Australia released minutes of the latest policy meeting when it left rates unchanged.  The minutes suggested that interest rates are likely to remain neutral at least in the near term as economic growth is relatively on track. The aussie jumped to $0.7552 in reaction to the minutes before steadying to $0.7537.

The euro and sterling traded sideways against the dollar in the countdown to the BoJ and FOMC announcements tomorrow.  The euro traded a tight $1.1168-80 range. The pound traded between $1.3025-45 range in Asia.

The economic calendar is light today with US building permits and housing starts data worth looking at.

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