What is the Fed Thinking? BOJ Up Next

The Federal Reserve left its statement virtually unchanged, defying forecasts it would tip its hand toward a later taper. The New Zealand dollar later jumped as the RBNZ pointed to rate hikes in 2014. The yen was the laggard on the day but the Bank of Japan decision could change all that. 

The FOMC decision was a headscratcher. As one analyst put it: It was as if the Fed wanted to send a message by changing as little about the statement as possible. The message was almost the same as it was six weeks ago before the shutdown and the recent blip in economic data. Does it mean the Fed is itching to taper? Or maybe it means nothing at all.

The market certainly expected some stronger nod toward the shutdown or softer economic growth. That was enough to lead to a broad US dollar rally. The danger may be trying to read too much into the statement. On Friday, Bullard, Kocherlakota and Lacker deliver speeches and may offer some much-needed interpretation.

The dollar made a solid 60-70 pip jump across the board but there has been no follow through as traders digest the news. One reason is soft economic data; the Oct ADP jobs report rose 130K compared to 150K expected along with downward revisions to September. US Sept core inflation was also a touch soft.

One exception was NZD as it climbed from as low as 0.8192 to 0.8266 after the RBNZ decision. Rates were held at 2.50% but Wheeler reiterated rate hikes would be needed in 2014. He tempered that by saying the strong NZD could give him reasons to wait longer because it depresses import prices.

Traders in Asia will have plenty to digest, including the rebound in Asian stocks yesterday.  Markit publishes its Japanese manufacturing survey at 2315 GMT but the trading focus will be on the BOJ at about 0400 GMT.

It's likely too early for the Bank of Japan to abandon its current path and there is chatter they will upgrade 2014 growth forecasts. Watch for signs of disappointment in slow inflation, which would send USD/JPY higher.