Dollar Rises Against Euro, Yen Plunges as BOJ Keeps Rates Unchanged | Daily Market Analysis

Key events:      

• UK – CPI (YoY) (Dec)
• Eurozone – CPI (YoY) (Dec)
• USA – Core Retail Sales (MoM) (Dec)
• PPI (MoM) (Dec)  
• Retail Sales (MoM) (Dec)

The dollar is getting stronger against the euro and stable against the pound sterling in the course of trading on Wednesday. The Japanese yen is getting cheaper amid the results of the Bank of Japan meeting.

The Bank of Japan left key monetary policy parameters unchanged on the results of its two-day meeting, which ended on Wednesday. The short-term interest rate on commercial bank deposits at the Central Bank is kept at minus 0.1% per annum, and the target yield on ten-year government bonds - about zero, according to a statement from Japan's central bank, released on the results of the meeting. This decision was made unanimously. It also coincided with the forecasts of most analysts.

​

The bank also kept the range within which the yield of ten-year government bonds (JGB) may fluctuate from plus/minus 0.5%. At the same time, some economists expected the Bank of Japan to give up control of the government bond yield curve.

The regulator, as part of its quarterly review, worsened its GDP growth forecast for fiscal 2022, which ends in March, to 1.9% from the previously expected 2%, citing slower economic growth overseas and high commodity prices. The fiscal year 2023 is expected to rise 1.7% from the previous estimate of 1.9%. Inflation is also expected to be about 3% this fiscal year, slowing to 1.6% next.

Among other things, Lael Brainard is expected to speak this week. The Fed's chief speaker is usually considered to be Jerome Powell. Brainard, however, is vice-chairman after all. Powell chairs the FOMC, with Brainard leading the Dove Caucus on the committee.

Her scheduled question-and-answer session appearance this week is important because it will take place on Thursday, the day before the silence period before the meeting begins. If Brainard signals a hawkish approach, following many of her colleagues, and talks about raising rates to 5% and keeping them high, it seems that it would completely dash hopes that the Fed will not move as planned or lower rates in late 2023. If her speech contains dovish signals, however, the market rally may continue.

​

If the rally is destined to end, it will happen this week, and Brainard's speech is enough for that. The rally could come to a halt this week as well because of the options' expiration. Gamma accumulation (at least as of Friday) is noted at 4,000, with the maximum gamma on call options also being fixed at 4,000.

As long as that is the case, the S&P 500 is likely to be capped at 4000, and the index is not likely to move much higher. Could the S&P 500 reach the 4025 level? Sure. Can it go much higher? Not likely. That would require the options market to give the index permission to go higher, which would require the maximum gamut for call options to go as high as 4100.

The Treasury General Account (TGA) balance has been shrinking lately, contributing to liquidity in the market and reserves. Usually, the balance rises in the middle of the month after the treasury auctions are settled, which means the TGA is likely to rise this week, which could lead to a reduction in bank reserves and liquidity in the market.