Yen off 6-week low after "helicopter money" mania shot down

The yen hovered above six-week lows on Friday after comments from Bank of Japan Governor Haruhiko Kuroda dented speculation Japan may be preparing a radical "helicopter money" economic stimulus.

The yen bounced back to 105.88 yen per dollar from 107.49, its six-week low against the U.S. currency touched on Thursday.The rebound was triggered by Kuroda's comments on a BBC Radio 4 interview on Thursday playing down the idea of helicopter money, essentially a policy of injecting cash directly to the economy in some form by printing money.

With Prime Minister Shinzo Abe crafting a massive spending package worth about $190 billion to bolster the economy, some speculators had bet the BOJ could be financing the additional spending - likened by economists to dropping large amounts of cash from a helicopter.

The BBC later said its interview with Kuroda had been conducted in mid-June, helping to cool the yen's gains.Certainly his comments have not dispelled expectations of easing. I suspect a rough consensus in the market is increase in buying of ETFs and REITs as well as 0.10 percentage point cut in interest rates," said Koichi Takamatsu, head of forex at Nomura Securities.

Few market players take Kuroda's words at face value after he introduced negative interest rates in January only days after he said publicly that he was not considering such measures.

A small number of market players, however, think the BOJ may opt to ease later to keep its dwindling fire power.

"I think the BOJ is more likely to ease in November when the government's supplementary budget will be ready, rather than now. I'm not sure if the BOJ feels it needs to act now, when even the Bank of England has not eased," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

FOMC minutes: Fed to 'wait and see' for even longer due to Brexit

Little news in the minutes from the June FOMC meeting, which took place just eight days before the UK's EU vote. Most of the information we already got in the FOMC meeting statement and Fed chair Yellen's press conference after the end of the meeting. 

The Fed was already in  a wait and see' mode before the UK's EU vote due to the mixed signals from data (strong pickup in activity growth in Q2 but weak employment growth). With Brexit this is even more true and we think the Fed will 'wait and see' for even longer. 

Market participants agree that the Fed is on hold for now as markets only price in a fifty-fifty chance of a Fed hike before year-end next year. 

The minutes confirm the message Fed chair Janet Yellen sent at the press conference, where she said that a Brexit ' could have consequences ' for the US economic outlook and financial markets developments. The minutes state that the Fed will have to 'wait for additional data regarding labor market conditions as well as information that would allow them to assess the consequences of the U.K. vote for global financial conditions and the U.S. economic outlook '. 

Now that we know the UK voted to 'leave' the EU, we have lowered our growth forecasts for the US economy from 1.9% to 1.7% this year and from 2.3% to 1.9% next year. The reason is that the US economy is not immune to a slowdown in Europe. Hence, we also expect the Fed to be on hold until June 2017 and only to hike twice next year (we expect the following hike in December 2017) . As we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely. 

We think the risk to our Fed view is balanced so the next hike could come sooner if the impact of Brexit on the economy is smaller than we currently expect (or later if bigger). 

Otherwise, the FOMC mainly discussed how to interpret the mixed data, especially the weak jobs reports. The minutes state that the FOMC ' discussed a range of interpretations of these data '. ' Many ' FOMC members think that the jobs growth in recent months have been lower than the ' underlying pace ' due to transitory factors as noise and strikes. ' Some ' noted that other labour market indicators have been stronger while also ' some ' thought that it could be ' indicative of a broader slowdown ' in the economy. 

The next important data release is on Friday when the June jobs report is due. Even if we see a rebound after the weak reports in April and May, this would probably not be enough to bring back the Fed hiking theme due to Brexit. The Fed needs data from after Brexit to analyse the impact of Brexit on the economic situation in the US before moving on. Since PCE core inflation is still below 2%, inflation expectations (both survey-based and market-based) have fallen and wage inflation is still subdued, the Fed can afford to stay patient.