FOMC in focus, but also watch for BoJ Tankan and BoJ policy meeting

With a December FOMC lift-off mostly priced in by the markets, the focus will be on how the Fed communicates its rate hike path through Yellen's press conference and dot charts. While a dovish surprise would likely weigh on the USD, the effect on USDJPY may be offset if a dovish signal supports risk sentiment, and vice versa. In past Fed hike scenarios, USDJPY tended to weaken at least in the early stages of the hiking cycle, even during the 2004 hikes, when USDJPY eventually moved higher. During the 1994 and 1999 cycles, USDJPY weakened throughout the Fed hikes because JPY appreciation exceeded USD strength. 

"While the risk of a short-term USDJPY rally cannot be dismissed, we believe the sidelined BoJ and JPY undervaluation should limit the upside, as we continue to expect USDJPY to trade range-bound around 123", notes Barclays.

While the FOMC is the biggest focus, the Bank of Japan (BoJ) Tankan Survey (Monday) and monetary policy meeting (Friday) will also be watched. In particular, the Tankan will shed more light on the latest developments on corporate sentiment, capex outlook, and inflation expectations, which will have implications for the BoJ policy outlook. 

A drop is expected in both large manufacturer DI (to +8, from +12 in September; consensus: +11) and large non-manufacturer DI (to +19, from +25; consensus: +23) due to modest consumption and weak overseas demand. Large companies are expected to plan to boost their capex by +10.6% y/y in FY15 (consensus: +10.2%), only a small downward revision from +10.6% in September. 

In this sense, production capacity DI for large companies should provide some clarity on capacity shortage. Another focus for monetary policy is the inflation outlook of enterprises (released on Tuesday), where corporate inflation expectations have drifted lower in recent quarters. While the results of the Tankan will be important for the monetary policy outlook, the BoJ is widely expected to stay on hold. However, Governor Kuroda's views on the preceding Fed decision, as well as the result of the BoJ Tankan, should be watched.