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Yen Spikes Lower after BoJ, But No Follow Through Selling Yet

Yen spikes lower broadly after BoJ announced to strengthen the framework for continuous powerful easing. But at this point, there is no follow through selling seen yet. Instead, of raising the target on 10 year JGB yields, BoJ simply allow flexibility to move it in move directions of up and down. Also, it added forward guidance that interest rates will stay extremely low for an extended period of time. 10 year JGB yields drops sharply from day high at 0.115 and breaches 0.07. Nikkei, on the other hand, cheers the announcement and reversed earlier loss, up 0.13% at the time of writing.

Staying in the currency markets, while Yen is weak, Canadian Dollar is even worse today on report that Canada is rejected from the US-Mexico NAFTA talk in an unusual move. Australian Dollar is showing some strength. Euro and Swiss Franc follow as the second and third strongest. But the common currency will face the tests of Eurozone GDP and CPI in European session. Dollar is mixed for today as markets await a string of economic data from the US, including consumer confidence and PCE inflation.

Technically, while Yen spikes lower, USD/JPY is held below 111.53 minor resistance, and thus, maintains near term bearishness. GBP/JPY is also held below 146.51 minor resistance. EUR/JPY breaches equivalent resistance at 130.25 but lacks follow through buying so far. USD/CAD breaches 1.3092 but also lacks follow through buying. Overall, there is no “committed” direction in the markets yet.

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Yen falls broadly as BoJ strengthens the framework for continuous powerful easing

Yen is sold off sharply after BoJ announced the “Strengthening the Framework for Continuous Powerful Monetary Easing“.

On Yield Curve Control framework BoJ voted 7-2 on the following decision. Firstly, short term interest rate target is held unchanged at -0.1%. Secondly, 10 year JGB yield target is maintained at around 0%. But, “yields may move upward and downward to some extent mainly depending on developments in economic activity and prices”. The annual pace of monetary expansion is kept at around JPY 80T. BoJ also noted that “in case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately”.

Y Harada and G Kataoka dissented the above decision. Harada said allowing long term yields to move upward and downward was to some extent “too ambiguous”. Kataoka continued his push to broaden the target to JGB of 10-years and longer.

BoJ also added forward guidance on interest rate. It said “the Bank intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, taking into account uncertainties regarding economic activity and prices including the effects of the consumption tax hike scheduled to take place in October 2019.”

BoJ: Growth to slow in 2019/20, inflation expectations lagging behind

In the latest Outlook for Economic Activity and Prices, BoJ said the economy is “likely to continue growing at a pace above its potential in fiscal 2018”. For fiscal 2019 through fiscal 2020, the expanding trend is expected to continue, “partly supported by external demand”, but pace will “decelerate” due to “cyclical slowdown in business fixed investment” and the impact of planned sales tax hike.

Year-on-year ex-food CPI stayed positive but continued to show “relatively weak developments”. And, rise in medium- to long-term inflation expectations has been “lagging behind”. BoJ noted that’s because “the mindset and behavior based on the assumption that wages and prices will not increase easily have been deeply entrenched”. But inflation is still expected to increase gradually towards 2% target, “although it will take more time than expected”.

For fiscal 2018, risks are generally balanced. But risks are skewed to the downside for fiscal 2019.

Also release from Japan, unemployment rate rose 0.2% to 2.4% in June. Industrial production dropped -2.1% mom in June. Housing starts dropped -7.1% yoy. Consumer confidence dropped -0.2 to 43.5 in July.

CAD dives as Canada rejected from US-Mexico NAFTA talks

Canadian Dollar drops sharply on a report by the National Post that it’s rejected from the senior level NAFTA talks between the US and Mexico, which will be held later this week. Quoting unnamed source, the report noted that the request by Canadian Foreign Affairs Minister Chrystia Freeland to join the meeting was ignore or spurned outright by US Trade Representative Robert Lighthizer. And Lighthizer is planning not to involve Canada unless the latter make some major concessions.

Separately, it’s reported that the US and Mexico will hold ministerial-level NAFTA trade talks on Thursday in Washington. According to a Mexican source quoted by Reuters, there will be “technical meetings probably until Wednesday and a ministerial meeting on Thursday.”

China PMI manufacturing dropped to 51.2, short term downward pressure emerged

The official China PMI manufacturing dropped -0.3 to 51.2 in July, below expectation of 51.3. Official PMI services dropped -1.0 to 54.0, missed expectation of 55.0. Analyst Zhang Liqun noted in the release that despite the slight decline in the PMI index, “steady growth of the economy remained unchanged”. However, “short term downward pressure has emerged”.

Looking at the details, eight of the sub-indices declined in the month. They include production, new order, purchase volume, import, purchase price, ex-factory price, suppliers delivery, production and operation expectation, New export orders, was unchanged but in contraction region at 49.8. The data set is seen by some as the first sign of impact from increasing trade tension with the US.

New Zealand ANZ business confidence dropped to 10 year low, economy feels increasingly late in the cycle

New Zealand ANZ business confidence index dropped to -45 in July, down -5 pts. That’s the lowest level since May 2008. Own activity index dropped -5 pts to 4, lowest since May 2009. Sub-indicators were weak across the board, and retail is the least
confident sector.

ANZ noted in the release that “this economy feels increasingly late in the cycle”. While fiscal stimulus and strong terms of trade will support growth, “sustained low business confidence increases the risk that firms will delay investment and hiring decisions”. “The Road ahead is looking less assured, and risks of a stall have increased.

Also from down under, New Zealand building permits dropped -7.6% mom in June. Australia building approvals rose 6.4% mom in June.

Looking ahead

Eurozone Q2 GDP and CPI will be the major focus in European session. Eurozone will also release unemployment rate. Germany will release retail sales and unemployment. Later in the day, Canada will release GDP, IPPI and RMPI. US will release personal income and spending, employment cost index, S&P Case-Shiller house price, Chicago PMI and consumer confidence.

USD/JPY Daily Outlook

Daily Pivots: (S1) 110.92; (P) 111.04; (R1) 111.20; More…

USD/JPY spikes higher to 111.43 earlier today but upside is limited below 111.53 minor resistance. Intraday bias stays neutral for consolidation above 110.58 temporary low. with 111.53 intact, deeper fall is expected. On the downside, below 110.58 will extend the corrective fall from 113.17. But in that case, we’d expect strong support from 38.2% retracement of 104.62 to 113.17 at 109.90 to bring rebound. On the upside, break of 111.53 will turn bias to the upside for retesting 113.17 high.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.36 support holds.

Economic Indicators Update

22:45NZDBuilding Permits M/M Jun-7.60%7.10%6.90%
23:01GBPGfK Consumer Confidence Jul-10-9-9
23:30JPYJobless Rate Jun2.40%2.30%2.20%
23:50JPYIndustrial Production M/M Jun P-2.10%-0.30%-0.20%
01:00NZDANZ Business Confidence Jul-44.9-39
01:00CNYManufacturing PMI Jul51.251.351.5
01:00CNYNon-manufacturing PMI Jul545555
01:30AUDBuilding Approvals M/M Jun6.40%1.00%-3.20%-2.50%
04:03JPYBoJ Rate Decision-0.10%-0.10%-0.10%
05:00JPYHousing Starts Y/Y Jun-7.10%-2.50%1.30%
05:00JPYConsumer Confidence Jul43.543.843.7
06:00EURGerman Retail Sales M/M Jun1.00%-2.10%
07:55EURGerman Unemployment Change (000’s) Jul-10K-15K
07:55EURGerman Unemployment Claims Rate Jul5.20%5.20%
09:00EUREurozone Unemployment Rate Jun8.30%8.40%
09:00EUREurozone CPI Estimate Y/Y Jul2.00%2.00%
09:00EUREurozone CPI Core Y/Y Jul A1.00%0.90%
09:00EUREurozone GDP Q/Q Q2 A0.40%0.40%
09:00EUREurozone GDP Y/Y Q2 A2.20%2.50%
12:30CADIndustrial Product Price M/M Jun0.20%1.00%
12:30CADRaw Materials Price Index M/M Jun2.70%3.80%
12:30CADGDP M/M May0.30%0.10%
12:30CADGDP Y/Y May2.30%2.50%
12:30USDPersonal Income Jun0.40%0.40%
12:30USDPersonal Spending Jun0.40%0.20%
12:30USDPCE Deflator M/M Jun0.10%0.20%
12:30USDPCE Deflator Y/Y Jun2.30%2.30%
12:30USDPCE Core M/M Jun0.10%0.20%
12:30USDPCE Core Y/Y Jun2.00%2.00%
12:30USDEmployment Cost Index Q20.70%0.80%
13:00USDS&P/Case-Shiller Composite-20 Y/Y May6.40%6.60%
13:45USDChicago PMI Jul61.864.1
14:00USDConsumer Confidence Index Jul126.5126.4
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