Mon, Mar 19, 2018 @ 03:07 GMT

BoJ summary of opinions at March meeting: Need to explain the difference between normalization and tightening

    BoJ summary of opinions at March 8-9 policy meeting showed no change in the board’s stance on monetary policy. Generally speaking “powerful monetary easing” will be maintained as it’s “still a long way” to meet 2% inflation target. There were concerns of Yen’s appreciation and stocks’ decline as they would “constrain wages and prices” and risk delaying of meeting price target. the board also saw the need to explain the difference between “normalization” and “tightening” even though it’s not in the phase to consider normalization. So we’ll likely hear more rhetorics from BoJ Governor Haruhiko Kuroda ahead regarding exit. Yet he’ll repeat and repeat that it’s not there for exit yet.

    Some quote highlights:-

    • If the current trends of the appreciation of the yen and the decline in stock prices become prolonged, business fixed investment and consumption will be restrained due to negative wealth effects and a deterioration of households’ and firms’ balance sheets, and the profits of export industries will decrease due to the adverse effects on exports. As these will constrain wages and prices, there will be a risk of a delay in achieving the price stability target.
    • The year-on-year rate of change in the consumer price index (CPI) is likely to continue on an uptrend and increase toward 2 percent, mainly on the back of an improvement in the output gap and a rise in medium- to long-term inflation expectations.
    • In terms of projecting price developments, the key is to what extent wage developments after the annual spring labor-management wage negotiations will improve individual firms’ price-setting stance and consumers’ acceptance of price rises.
    • Considering that there is still a long way to go to achieve the price stability target of 2 percent, it is appropriate to pursue powerful monetary easing with persistence under the current guideline for market operations in order to firmly maintain the momentum toward achieving the price stability target
    • This is not the phase in which the Bank should consider “normalization” — that is, gradually reducing the degree of monetary accommodation — in a concrete manner. However, the Bank needs to explain to market participants so that they can fully understand that “normalization” is still in the process of monetary accommodation and completely different from monetary tightening, which aims at reducing the positive output gap. Such explanation will also be beneficial in smoothly proceeding with “normalization” in the future.
    • If there is a heightened risk that achieving the price stability target will be delayed, additional monetary easing will be needed

    Full release here

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    DOW approaching breakout point

      DOW opens mildly higher today. It’s staying in converging triangle pattern. And should be approaching a breakout point. Levels to watch are 24668.83 and 25449.15.

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      U of Michigan Sentiment 102 vs exp 99.3; Industrial production 1.1% vs exp 0.3%; Housing starts 1.24m vs exp 1.30m

        US session data wrap up:-

        • US U of Michigan sentiment Mar P: 102 vs exp 99.3 vs prior 99.7
        • US industrial production Feb: 1.1% mom vs exp 0.3% mom vs prior -0.3% mom
        • US capacity utilization Feb: 78.1% vs exp 77.7% vs prior 77.4%
        • US housing starts Feb: 1.24m vs exp 1.30m vs prior 1.33m
        • US building permits Feb: 1.30m vs exp 1.33m vs prior 1.38m
        • Canada manufacturing sales Jan: -1.0% mom vs exp -0.9% vs prior -0.1% mom
        • Canada international securities transactions (CAD) Jan: 5.68b vs prior exp 9.11b vs prior -1.54b
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        Merkel criticized Trump’s tariffs as against the WTO principles

          German Chancellor Angela Merkel criticized that US President Donald Trump’s steel and aluminum tariffs are against the principles of the WTO. And “we want to change or solve these problems via discussions if possible.”

          At the same occasion, Swiedish Prims Minsiter Stefan Lofven said the tariffs are worrying and regrettable.

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          Yen broadly higher into US session, CAD/JPY increasing downside bias

            Yen staying strongest entering into US session. Commodity currencies are under pressure.

            CAD/JPY in down trend across time frame. With increasing intraday downside bias.

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            EU expects Brexit transition deal to be provisional

              An unnamed EU official quoted saying that there will be a transition Brexit deal next week. But that would be provisional. He’s quoted:

              • “There could be an agreement on transition, but it would in any case only be a provisional agreement,”
              • “It would be completely dependant on what will be the fate of the withdrawal agreement. Of course, if there is no withdrawal agreement, there will be no transition.”

              It’s reported earlier that UK Brexit Secretary David Davis is targeting to complete the legal text of the transition deal at the two-day summit from March 22.

              However, it’s unlikely for a resolution on soft Irish border to be reached.
              Intensive talk is now planned between March 26 and April 18 on the issue.

              So, yes, the best transition deal will be provisional.

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              BoE FPC statement talks Brexit, domestic and global risks

                Some highlights on BoE’s FPC statement from the March 12 meeting:-

                • “Apart from those related to Brexit, domestic risks remain standard overall, and that risks from global vulnerabilities remain material.”
                • Globally, “the principle risks are in debt markets”
                • “Risks stemming from corporate debt in the United States have continued to build. “
                • “Financial vulnerabilities in China remain elevated.”
                • “Current account deficit remains large by international standards.”
                • “Over recent quarters (the current account) deficit has been increasingly funded by capital inflows – rather than sales of foreign assets by UK residents – thus increasing the UK’s reliance on the confidence of foreign investors,”
                • “The UK banking system could continue to support the real economy through a disorderly Brexit.”
                • “The FPC judged that Brexit risks did not warrant additional capital buffers for banks.  Developments since November have not changed this assessment.”
                • “The FPC judges that existing crypto-assets do not currently pose a material risk to UK financial stability”

                Full statement here

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                ECB Praet prefer not to revise forward guidances too early

                  ECB chief economist Peter Praet sounds cautious as usual. In the latest ECB meeting, the central bank took away the option to expand the asset purchase program again. But going further, Praet said “I would not revise the guidance too early, because that could send wrong signals about the end of our net asset purchases.” And, “I wouldn’t say there is a date or a deadline” for the program.

                  He also added that “it is clear that if you believe that the degree of slack is higher, then the process of convergence to below, but close to, 2 percent over the medium term would be drawn out. ” And, “other things being equal, it would (mean a) shallower (inflation path)”.

                  Referring to ECB’s pledge to keep interest at current level “well past” end of asset purchase, Praet said “markets quantify the ‘well past’ interval as ‘up to next spring’.” And he emphasized that “once you stop net asset purchases the signaling aspect of the asset purchase program disappears and you therefore have to be much more precise about the future path of the short term rates.”

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                  Fitch predicts 25bps RBA hike in 2018, 50bps hike in 2019

                    Fitch rating agency predicts RBA to raise cash rate by 25bps this year. It also predicts another 50bps hike next year in 2019.

                    What Fitch observed is that RBA appears comfortable lagging behind other central banks in tightening policy, allowing exchange rate flexibility to serve as a buffer”. This is in-line with what RBA Governor Stephen Lowe has repeated a couple of times. That is, RBA didn’t cut as deep as other global central banks. And therefore, it also doesn’t need to reverse that cycle as others like Fed and BoC.

                    But Fitch expects Australia economy to gain further momentum this year with growth holding steady at 2.7% in 2019. That’s thanks to “strong terms of trade on income, broadly accommodative financial conditions and buoyant prospects for investment”.

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                    IMF Lagarde: Fix economic imbalances with fiscal means, not trade obstacles

                      IMF Managing Director Christine Lagarde on trade war:-

                      • She urged politicans to “resolve trade disagreements without resort to exceptional measures”.
                      • “Trade wars not only hurt global growth, but they are also unwinnable”.
                      • “We know that the self-inflicted harm of import tariffs can be substantial even when trade partners do not retaliate with tariffs of their own,”
                      • “We also know that protectionism is pernicious, because it puts the biggest strain on the poorest consumers who buy relatively more low-priced imports. In other words, harming trade is bad for the economy and bad for people.”
                      • “The way to address global economic imbalances is not to raise new obstacles to trade. Using fiscal means to address global imbalances is critical. This includes, for example, lowering deficits in the US to bring public debt towards a sustainable path, and stronger infrastructure investment and education spending in Germany,”
                      • “And importantly, those who are adversely affected by globalization and technological progress should receive more support to ensure that they can invest in their skills and transition to higher-quality jobs.”

                      The IMF’s Global Prospects and Policy Challenges report:-

                      • “The global expansion is gaining strength from the pick-up in international trade, and it should not be put at risk by the adoption of inward-looking policies,”
                      • “The modernization of the rules-based multilateral trade system should continue, anchored in the World Trade Organization, with well-enforced rules that promote competition and a level playing field. Co-operation is also needed to tackle excess global imbalances.”
                      • “The re-emergence of unilateral trade restrictions may escalate tensions and fuel global protectionism, disrupting worldwide supply chains and affecting long-term productivity.”
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                      U.S. Chamber of Commerce: USD 60b tariffs on Chinese goods is devastating to American families

                        U.S. Chamber of Commerce President and CEO Thomas Donohue criticized that unilateral tarrifs on Chinese goods by Trump’s government would be destructive to the economy. He warned that the USD 30b a year tariffs on Chinese good would w”ipe out over a third of the savings American families received from the doubling of the standard deduction in tax reform.” Further, with Trump’s request of USD 60b a year tariff, “the impact would be even more devastating.”In addition, Donohue said “tariffs could lead to a destructive trade war with serious consequences for U.S. economic growth and job creation,”

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                        UK-EU planning instensive talk on Irish border, after completing the transition deal

                          UK Brexit Secretary David Davis is targeting to complete the legal text of the transition deal at the two-day summit from March 22. Most of the differences would likely be bridged on the following days. But the criteria of avoiding a hard Irish border remains a key showstopper. EU proposed a fall back option in its own draft published earlier this month. That is, should there be no compromisable solution, Norther Ireland would stay in the customs union along side Republic of Ireland. But UK Prime Minister Theresa May has instantly and bluntly rejected that idea. Intensive talk is now planned between March 26 and April 18 on the issue. There is some optimism on completing the transition agreement among UK officials. But businesses in UK would definite request a deal with full clarity. Any conditions in the deal attached to the outcome of Irish border issue would dissatisfy UK businesses and markets.

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                          RBA Debelle: Markets underpriced risks of global tightening

                            RBA Deputy Governor Guy Debelle:-

                            • “Equity prices embody a view of the future that robust growth can continue without generating a material increase in inflation.”
                            • “There is little priced in for the risk that this may not turn out to be true.”
                            • Market volatility in February, was just “a small example of what could happen following a larger and more sustained shift upwards in the rate structure.”
                            • He admitted before wrong in predicting higher volatility before, but added “I think there is a higher probability of being proven correct this time.”
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                            February 25 imagery suggests North Korea testing nuclear reactors at Yongbyon

                              Defence & security intelligence analysts Jane’s reported that North Korea likely had preliminary testing it’s nuclear reactors at the Yongbyon research facility. That came weeks ahead of the planned meeting between North Korean Leader Kim Jong-un and South Korean President Moon Jae-in next month. There will also be a planned meeting between Kim and US President Donald Trump in May.

                              But it should be noted that the analysis was based on an imagery from February 25. Jane’s noted:-

                              • Satellite imagery suggests that preliminary testing of North Korea’s experimental light water reactor (ELWR) at Yongbyon may have begun.
                              • Signatures of testing in late February follow logically from numerous indicators of increased activity at the ELWR that were visible throughout 2017, although reactor criticality is only likely to occur later in 2018 or in 2019.
                              • The ELWR was built and optimized for electricity production, but has ‘dual-use’ potential and can be modified to produce fissile material for nuclear weapons.


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                              BusinessNZ manufacturing PMI dropped to 53.4, NZD/JPY extending dive

                                New Zealand Business NZ manufacturing PMI dropped to 53.4 in February, down from 54.4.


                                • Production up 0.4 to 53.9
                                • Employment up 3.3 to 54.8
                                • New orders up 5.1 to 54.8
                                • Deliveries up 2.9 to 52.7
                                • Finished stocks down -1 to 51.1

                                Comments from Bank of New Zealand economist Doug Steel:-

                                • “The generally slower PMI suggests we shouldn’t expect Q1 manufacturing GDP to be much different from the flat result recorded in yesterday’s official figures for Q4,”
                                • “Early livestock culling on account of adverse weather seemed to boost Q4 manufacturing activity but will have the opposite effect through early 2018 given New Year rains.”
                                • “It all suggests primary processing will be a drag on manufacturing activity early in 2018,”

                                Comments from Business NZ manufacturing executive director Catherine Beard:-

                                • Pace of expansion had levelled off in recent months
                                • “noted the sluggish start to the year with a dip in new orders being a common message.”

                                Sharp fall in NZD/JPY this week suggests that rebound from 75.92 has completed at 78.61. The cross was held by 55 day EMA slightly below 50% retracement of 81.55 to 75.92. For the near term, it’s going to revisit key support level around 75.65/75.92. It remains to be seen if there is enough selling to push through this key support zone. But outlook is not looking good.

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                                DOW extending triangle pattern; EURJPY, EURGBP, USDCAD on the move

                                  Dow trading up over 1% at the time of writing, back above 25000 handle. It looks like price actions from 25800 are forming a triangle pattern. More upside would be in favor as long as 24217.76 support holds, for retesting 26616.71 record high.    Yen remains the strongest one today even though it’s paring some gains in the current 4 hour period. It’s followed by the resilient Sterling. Commodity currencies are generally weak.

                                  A few technical development to note:-

                                  EUR/JPY’s rebound from 129.34 could have completed at 132.40, heading back to 129.34.

                                  EUR/GBP extending the fall from 0.8976 to 0.8771 support.

                                  USD/CAD broken 1.3000 for rally resumption to 1.3065 fibonacci level.

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                                  Mexican Guajardo : NAFTA will continue, just maybe without US

                                    Mexican Economy Minister Ildefonso Guajardo warned today: –

                                    • “You have to be ready to live with a NAFTA without the U.S.”
                                    • “NAFTA at risk of ending? No. NAFTA will continue between Canada and Mexico because at the end of the day, what is important is you send a message that you believe in free trade. The U.S. is the one that will decide to be in or out.”

                                    Canadian Prime Minister Justin Trudeau said yesterday:-

                                    • An “eminently achievable win-win-win” result available on NAFTA
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                                    Dollar mildly higher after data. Jobless claims drop 4k to 226k

                                      First batch of US data release:-

                                      • Initial jobless claims Mar 9: 226k vs exp 226k vs prior 230k
                                      • Continuing claims Mar 2: 1.88m vs exp 1.90m vs prior 1.88m
                                      • Empire state manufacturing Mar: 22.5 vs exp 15.0 vs prior 13.1
                                      • Philly Fed manufacturing Mar: 22.3 vs exp 23.0 vs prior 25.8
                                      • Import price index Feb: 0.4% mom vs exp 0.2% mom vs prior 0.8% mom

                                      Dollar strengthens mildly after the release.

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                                      SNB Jordan warns protectionism is damaging for everyone

                                        SNB chairman Thomas Jordan warned of US protectionism in a radio interview today:-

                                        • “The risks have not materialised yet, but if international trade doesn’t function well, that is damaging for everyone,”
                                        • “Safe havens are sought when there are political uncertainties or big changes in the financial markets. This can be triggered by protectionism,”
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                                        Dovish SNB stands pat, lowers inflation forecasts

                                          SNB left sight deposit rates unchanged at -0.75%, three-month Libor range at -1.25% to -0.25%, as widely expected. Inflation forecasts for 2018 and 2019 are lowered due to Swiss Franc’s appreciation to Dollar. SNB maintained that negative rate and intervention are essential

                                          Latest forecasts:-

                                          • 2018 inflation forecast: 0.6% (prior 0.7%)
                                          • 2019 inflation forecast: 0.9% (prior 1.1%)
                                          • 2020 inflation forecast: 1.9%
                                          • 2018 GDP forecast: around 2%

                                          Key quotes from the release:-

                                          • Since the last monetary policy assessment in December, the Swiss franc has appreciated slightly overall on the back of the weaker US dollar.
                                          • The Swiss franc remains highly valued.
                                          • The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary therefore remain essential.
                                          • The SNB continues to expect GDP growth of around 2% for 2018 and a further gradual decrease in unemployment.

                                          Market reactions to the release is muted as seen from EUR/CHF, USD/CHF and GBP/CHF below.

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