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Action Insight: Special Reports

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BOE United Again To Keep Policy Rate On Hold. GDP And Inflation Forecasts Downgraded Print E-mail
Special Reports | Written by | Feb 05 16 06:02 GMT
Joining the more dovish stance of other central banks in the advanced economy, BOE voted unanimously to keep the Bank rate unchanged at 0.5%. Contrary to market expectations, Ian McCafferty refrained from voting for a rate for the first time since last August, citing subdued wage pressure. The central bank also revised lower its growth and inflation forecasts as 'global financial conditions have deteriorated notably' while declining oil prices have weighed on inflation. Policymakers now see inflation to stay below 1% until the end of this year. Yet, Governor Mark Carney retained the view that it is 'more likely than not' that the next move would be a rate hike. He also cited, in his letter to the Chancellor, the volatility in risky assets, and weaker Chinese and emerging market growth are the key factors for below-target inflation.
FX 2016: Avoid Illusioned By Near-Term Euro Strength Print E-mail
Special Reports | Written by | Feb 04 16 09:42 GMT
EURUSD has breached the upper boundary of recent trading range. Rather than improvements in Eurozone's economic outlook, the rally has been driven by growing expectations that Fed's interest rate normalization schedule would be much more gradual than previous anticipated. Together with Fed funds rate hike in December, the FOMC dot plots indicated four rate hikes in 2016. Since the beginning this year, financial markets has been functioning with great volatility as China's economic activities have sharply deteriorated while uncertainty in emerging economies has risen significantly. USD strength and soft US data have also contributed to high volatility and risk aversion. The market developments have triggered that market trimmed its expectations of Fed funds rate hike. Meanwhile, ECB's credibility has again been ruined by its modest addition of stimulus in December. Although President Draghi had signaled more easing in March, the market was not much moved. Despite euro's potential strength in the near-term, we stay bearish over the single currency and retain the forecast of EURUSD parity later this year. Should global economic developments improve later in the year, the theme of policy divergence would take the centre stage again.
RBA Keeps Its Powder Dry, Leaves Door Open For Rate Cut Print E-mail
Special Reports | Written by | Feb 02 16 04:52 GMT
As universally expected, the RBA left the cash rate unchanged at 2% in February. This is the 10th consecutive meeting that the central bank has kept the monetary policy steady. Policymakers acknowledged the high volatility on stock markets, diminishing risk appetite, further growth slowdown in China and other emerging economies, and growing uncertainty in global economic outlook and monetary policy divergence, during the intermeeting period. Yet, they remained optimistic over the domestic growth momentum and saw inflation rise close to target, though further easing cannot be ruled out. Aussie's reaction after the announcement was mild, rising modestly higher but then reverting to original levels.
BOJ Adopts Negative Rates Print E-mail
Special Reports | Written by | Jan 29 16 06:32 GMT
On a surprising move, BOJ cut its benchmark rate to -0.1%, with a 5-4 vote, from 0.1% previously. This is the central bank's first rate adjustment since October 2010. Note, however, that the negative rates decision will only affect some accounts as it adopts a 'three-tier system'. The drive for the cut is to return inflation to the +2% target 'at the earliest possible time'. Policymakers also suggested that 'further decline in crude oil prices' and uncertainty particularly in the Chinese economy might prolong deflation in the country. The BOJ again delayed the timeframe for achieving this target to fiscal year 2017. Policymakers pledged to 'cut the interest rate further into negative territory if judged as necessary'. The BOJ left the asset purchase program unchanged at expansion of base money at an annual pace of 80 trillion yen.
Further Cuts Needed To Boost Inflation, RBNZ Says Print E-mail
Special Reports | Written by | Jan 28 16 06:07 GMT
RBNZ left the OCR unchanged at 2.5%, following a -25 bps cut last month. However, policymakers have turned more dovish and suggested inflation may take longer to reach the target range than previously expected. The central bank also suggested that further easing may be needed in coming months to make sure inflation would return to the middle of the target. The key concern is that further easing would further stoke Auckland’s housing market.
Fed Revised Economic Assessment Lower. Yet, Remained Confident Over Employment Print E-mail
Special Reports | Written by | Jan 28 16 04:28 GMT
The Fed left the policy rate unchanged in January, following a +25 bps hike a month ago.. While this had been widely expected, the post-announcement reaction suggests that the market interpreted FOMC's message as dovish. Investors were particularly concerned over the removal of the reference that risks to the outlook for both economic activity and the labor market are 'balanced'. The Fed appeared more cautious over the economic developments since the last meeting. Yet, it affirmed that strength in the job market in spite of the temporary growth slowdown. The annual Statement on Longer-Run Goals and Monetary Policy Strategy has showed that the median estimate for the 'normal rate' of unemployment fell to 4.9%, from 5.2-5.5% projected last year.
FX 2016: Oil to Determine Loonie's Direction, Again Print E-mail
Special Reports | Written by | Jan 26 16 14:07 GMT
Canadian dollar got a disastrous year in 2015, losing more than -19% against US dollar and the worst performing currency under our coverage. CAD's weakness was broadly based as its real effect exchange rate also recorded double digit decline last year. With 20% of the economy attributed to the oil and mining sector, the massive selloff of oil price hurt Canada's terms of trade which fell to the lowest in 12 years and greatly trimmed the country's revenue growth. CAD started 2016 with a soft note with USDCAD rising to as high as 1.4689, a level not seen since 2003, on January 20. Undoubtedly, it's again due to oil prices. Crude oil prices have extended weakness since the beginning of the year. Both WTI and Brent contracts have been down -18% year-to-date, a pace much faster than expected. While near-term fluctuation above 1.4 appears likely, we refrain from being overtly bearish over the loonie for now, given the possibility of very gradual oil price recovery and a improvement in Canadian economy driven by US growth. Risks to our forecast to USDCAD are to the upside, however.
ECB Signals Further Easing March, As Inflation Dynamics Deteriorated Significantly Print E-mail
Special Reports | Written by | Jan 22 16 04:26 GMT
The message that ECB sent following the January meeting turned out much more dovish than expected. Policymakers unanimously viewed that downside risks to growth are increasing again and inflation outlook should remain weak. They agreed to 'review and possibly re-consider' the monetary policy stance at the March meeting. The dovish ECB has, however, lifted market sentiment, sending equities higher. Crude oil prices also rebounded strongly despite another week of US inventory build. Euro weakened further against US dollar, British pound and Japanese yen. We expect the ECB would bring the deposit rate deeper in the negative territory by -10 bps to -0.4%. The actual impact on the economy might be limited though. Extension and addition of asset purchases are also likely.
BOC On Hold, Revises Lower Growth And Inflation Forecasts Print E-mail
Special Reports | Written by | Jan 21 16 04:36 GMT
BOC kept its overnight rate unchanged at 0.5%, despite persistent weakness in energy prices and heightened speculations of a rate cut ahead of the meeting. The Bank Rate also stayed at 0.75% and the deposit rate at 0.25%. Policymakers judged that risks to inflation are 'balanced'. However, the growth forecasts were revised lower for 2016 and 2017, as Canada's growth probably paused in 4Q15 due to temporary softening in US growth and weak investment. Generally, global economic developments remain in line with BOC's expectations. US growth remains 'on track, despite temporary weakness in the fourth quarter of 2015', whilst China continues 'its transition to a more sustainable growth path'. Policymakers expect global growth to trend upwards beginning in 2016. Policymakers believed more time is needed to see the effect of previous easing measures.
Worst Yet to Come for Antipodean Currencies Print E-mail
Special Reports | Written by | Jan 19 16 14:25 GMT
Antipodean currencies (AUD and NZD) recorded their 3rd consecutive year of losses against USD last year. However, we judge the decline is not yet over and both pairs should continue to find new post-crisis lows in 2016. The policy divergence theme certainly remains in play. Meanwhile, downturn of Chinese economy and weaker commodity prices should hurt growth of both Australia and New Zealand, weighing on the currencies further.
China's Domestic Activities Continue to Weaken, More Easing Expected in 2016 Print E-mail
Special Reports | Written by | Jan 19 16 07:25 GMT
China's GDP expanded +6.8% y/y in 4Q15, down from +6.9% a quarter ago. The economy grew +6.9% in full year 2015, the slowest in 25 years and down from +7.3% in 2014. All key domestic activity indicators came in weaker than expectations. Industrial production (IP) growth moderated to +5.9% y/y in December, compared with consensus of +6% and +6.2% in November. Retail sales gained +11.1%, also down from expectations of +11.3% and November's +11.2%. Urban fixed asset investment (FAI) gained +10% for full year 2015, down from +10.2% in 2014. We remain skeptical about the accuracy of Chinese data and expect further slowdown in economic growth this year. On a separate note, PBOC imposes required reserve ratio (RRR) on renminbi deposit placed in China by overseas financial institutions, effective January 25. The move aims to tighten offshore liquidity and curb speculations. 
BOE Leaves Policy Rate Unchanged, Delivers More Dovish Message Print E-mail
Special Reports | Written by | Jan 15 16 07:38 GMT
As expected, BOE voted 8-1 to keep the Bank rate unchanged at 0.5% in January. The size of asset purchase program also remained at 375B pound with unanimous vote. The accompanying minutes delivered a more dovish outlook for the economic growth, pushing back expectations for a BOE rate hike and sending the pound lower. The gloomier economic outlook depicted in the minutes appear to be paving the way for a downgrade of economic forecasts in the next meeting. Again, Ian McCafferty continued to vote for a rate hike, suggesting that 'an immediate start to policy normalization would facilitate a more gradual path for policy tightening over time'.
Stabilization Of Renminbi Unveils Contradiction To China's Objective Of Financial Market Liberalization Print E-mail
Special Reports | Written by | Jan 13 16 11:21 GMT
Risk sentiment has been dampened by China where both stock and currency markets have faced severe selloff as 2016 begins. For the former, the newly-launch circuit breaker mechanism has been suspended after stock exchanges were forced to suspend trading as the CSI 300 index had hit the maximum loss twice in a single week on the currency market, renminbi also got hammered with the onshore rate (CNY) plunging -1.56% against USD in the first week of 2016, before government action this week. Although the Chinese markets appear calmer in recent days, downside risks remain significant. More importantly, the government's intervention and its willingness to impose capital control in case of further outflow are in great contradiction with its goal to liberalize its financial markets.
FX 2016: USD Strength To Continue Amidst Fed’s Beginning Of Interest Rate Normalization Print E-mail
Special Reports | Written by | Jan 11 16 09:10 GMT
The dominant theme in the FX market in 2016 continues to be USD strength, driven by monetary divergence and steady US economic growth. The Fed raised the policy rate by +25 bps last December, ending the 7-year zero interest rate regime. While policymakers pledge that the normalization process would be gradual and dependent on macroeconomic data, the latest dot plots unveil that the members forecast 4 hikes in 2016. This represents a big contrast with other central banks in the developed economies, with BOJ and ECB easing further, not to mention emerging economies which should remain under pressure as the Fed begins normalization. Commodity currencies had a bad year with the majors under our coverage all registered double-digit decline against the greenback (AUD: -10.9%, NZD: -12.47%, CAD:-19.12%). Yet, we regret to say that the weakness would continue this year, as central banks might turn more dovish in the months ahead.
FX 2016: China Gives Green Light to USDCNY Strength Print E-mail
Special Reports | Written by | Jan 07 16 13:05 GMT
China's financial markets tumble as 2016 begins. While stock exchanges were forced to suspend trading a second time in a weak as the CSI 300 index fell more than -7%, the onshore-offshore renminbi spread widens to a record level, suggesting depreciation of renminbi is nowhere bottoming out. CNY (onshore renminbi) was fixed at 6.5646 to USD Thursday, down -0.5% from the previous day. PBOC has set the USDCNY fix higher every day since December 25. CNH, the offshore renminbi, plunged -0.8% to 6.7514 per USD after the fixing. Indeed, the gap between onshore and offshore renminbi has widened to a record level of 0.14 on Wednesday. The divergence reflects expectations that onshore renminbi should depreciate further. We forecast renminbi weakness to persist in 2016 with USDCNY rising to 6.7 in 2Q16 and then to 6.8 in 4Q16.
PBOC's Fixing Ended Renminbi's Losing Streak, Temporarily Print E-mail
Special Reports | Written by | Dec 21 15 13:18 GMT
Renminbi ended its 10-day losing streak as PBOC set the daily fixing at 6.4753 per USD (USDCNY), up +0.09% from Friday's 6.4814. Renminbi has dropped -1.5% against USD over the past 2 weeks, mainly driven by Fed's rate hike in December and concerns over Chinese slowdown in 2016 and 2017 despite improvement in macroeconomic indicators in November. According to China's state news agency, Xinhua, the drop of the past 2 weeks were "only a market phenomenon spawned by expectations of the rate hike". Nonetheless, PBOC's move on Monday aims at rescuing renminbi depreciation. Speculations of one-way devaluation of the currency would deteriorate the capital outflow problems currently facing the economy.
BoJ Surprisingly Increases ETFs Purchases Print E-mail
Special Reports | Written by | Dec 18 15 06:20 GMT
BOJ surprised the market by announcing to increase purchase of ETFs in December. Voting 6-3, the central bank will purchase ETFs at an annual pace of about 300B yen, in addition to the current program of ETF purchases under which their amount outstanding will increase at an annual pace of about 3 trillion yen. As noted in the statement, the purchases will begin with ETFs that track the JPX-Nikkei Index 400 and be composed of stocks issued by firms that are proactively making investment in physical and human capital. Actual purchase would begin in April 2016 with a view to 'offsetting possible market impact stemming from the scheduled sales of stocks that the Bank had purchased from banks for financial stability purpose'.
Fed Hikes By +25 Bps, Eliminates Cap For Overnight RRP Print E-mail
Special Reports | Written by | Dec 17 15 05:48 GMT
For the first time since 2006, the Fed raised the target range for the Fed funds rate by +25 bps, to 0.25%-0.5%. The decision was widely expected and was made in unanimous vote. To our, and the market's, surprise, the Fed removed that cap of the overnight reverse repo (RRP), a tool that allows investors to lend cash in exchange for Treasuries and an instrument that the Fed uses to raise short-term interest rate. FOMC judged that the risks to the outlook for economic activity and the employment market were 'balanced', compared with 'nearly balanced' as mentioned in previous meetings. The members anticipated inflation to return to 2% over the medium term. The central bank reiterated that it would continue to 'monitor inflation developments closely'.
RBA More Comfortable With Growth Outlook, Less Concerned Over Housing Price And Reiterated Risk For Further Easing Print E-mail
Special Reports | Written by | Dec 15 15 06:51 GMT
RBA minutes for the December meeting unveiled the rationale behind the decision to keep the cash rate unchanged at 2%. Policymakers acknowledged signs of improvement in the economy as recent domestic data had 'generally been positive'. They believed the improvements have been driven by low interest rates and weaker Aussie. The members suggested that the inflation outlook might offer some scope for further easing. Yet, judging from the overall economic developments, maintaining the monetary policy was appropriate at the meeting.
China Introduced New Renminbi Index; November Data Signals Growth Rebounds in 4Q15 Print E-mail
Special Reports | Written by | Dec 14 15 12:29 GMT
China's Foreign Exchange Trade System (CFETS) announced last Friday that it has launched a trade-weighted renminbi index so as to help the market gauge renminbi's movements. The index is consisted of 13 currencies and the weights are based on trade relationships, adjusted for re- export trade factors. In terms of FX rates used for calculating the index, they are based on "the daily CNY Central Parity Rate and CNY reference rate". The index is based to 100 on 31 December 2014. According to CFETS's statement, the widely-used bilateral RMB-USD exchange rate is not a good indicator of the international parity of tradable goods.
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