Sun, Oct 20, 2019 @ 00:37 GMT

BoJ Sakurai: Shouldn’t recklessly seek to hit price target with additional easing

    BoJ board member Makoto Sakurai said the central bank “shouldn’t recklessly seek to achieve our price target with additional easing”. Instead, the best monetary policy approach was to “patiently maintain” the current stimulus program. He acknowledged that “achievement of our price target is being delayed”. But that’s because “the relationship between monetary policy and price moves are changing and becoming more complex.”

    Sakurai also said BoJ should be very mindful of the negative effects of the ultra-loose monetary policy. He added, “while financial institutions’ capital-to-asset ratios are sufficient from a regulatory standpoint, what’s important to note is that they are declining as a trend.” Hence, “the BoJ must make appropriate policy decisions by scrutinizing the merits and demerits, including the risk our policy is building up financial imbalances.”

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    BoE stands pat on unanimous votes, little reaction in Sterling

      BoE left Bank Rate unchanged at 0.75% as widely expected. Asset purchase target was also kept at GBP 435B. Both decisions were made by unanimous vote. BoE noted in the statement that “global trade tensions have intensified and global activity has remained soft.” That led to “substantial decline” in forecast interest rates in advanced economies and “material loosening in financial conditions”, including the UK. Also, an “increased perceived likelihood” of no-deal Brexit further lowered UK interest rate and led to Sterling’s “marked depreciation.

      BoE also maintained that “assuming a smooth Brexit and some recovery in global growth, a significant margin of excess demand is likely to build in the medium term.”
      And “were that to occur, the Committee judges that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.”

      Full statement here.

      Sterling is steady after the release, having effectively no reaction. GBP/JPY is staying in consolidation from 131.61 temporary low. Such consolidation is expected to be relatively briefly and larger decline should resume sooner rather than later.

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      EU Tusk confirms Brexit summit on Nov 25 Sunday

        European Council President Donald Tusk confirmed that the extra EU summit on Brexit will be held on November 25.

        He said after meeting with chief negotiator Michel Barnier “If nothing extraordinary happens, we will hold a European Council meeting in order to finalize and formalize the Brexit agreement. It will take place on Sunday, November 25th at 0900 a.m.”

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        ECB Draghi and Constancio struck cautious tones

          ECB President Mario Draghi sounded cautious as usual in today’s comments. Here are some highlights:

          • “While we remain confident that inflation will converge towards our aim over the medium term, there are still uncertainties about the degree of slack in the economy,”
          • “A patient, persistent and prudent monetary policy therefore remains necessary to ensure that inflation will return to our objective,”

          Regarding recent stock market volatility, Draghi sounded calm though as he noted:

          • “These risks materialized in global equity markets in early 2018, although to date without significant spillovers to euro area credit markets and hence broader financial conditions.”

          ECB Vice President Vitor Constancio also spoke today:

          • “Inflation, which is our objective, has not yet responded completely to what we wish to see.”
          • “We have confidence that inflation will continue to evolve…(but) we should be cautious in order to avoid that some early, strongly restrictive policy could derail this development,” he added.
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          An update on EUR/JPY short

            Following up on EUR/JPY short (sold at 128.60, stop at 127.45). Last post here. EUR/JPY’s fall to 125.13 and rebound from there today was much quicker than we thought. 161.8% projection of 131.13 to 128.49 from 129.44 at 125.16 was just met but there was no follow through selling. And we actually missed quite a good opportunity to get out and re-sell. Nonetheless, the position short trade is still doing alright.

            Based on strong downside momentum, fall from 131.13 is seen as a five wave impulsive move. Rebound from 125.13 should form part of a wave four consolidation pattern. Then there will be another decline to complete the five wave sequence. We’d expect upside of the corrective rise from 125.13 to be limited by 127.40 resistance. This level is close to 38.2% retracement of 131.13 to 125.13, as well as 50% retracement of 129.44 to 125.13.

            So, we’ll keep the stop at 127.45. Meanwhile, firstly, a wave four consolidation in this case may take quite some time to develope. And the subsequent downside potential could be limited considering that it’s already close to 124.61 low. Therefore, we’ll close the short position on a dip to 126.00.

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            EUR/CHF heading back to 1.2, after drawing support from 4H 55 EMA

              EUR/CHF rebounds strongly in early US session. That’s primarily driven by selloff in “safe-haven” currencies as the movements in CHF and JPY are in sync. At the same time, EUR is extending consolidation against USD.

              Technically, EUR/CHF’s pull back from 1.2004 was held comfortably above 4 hour 55 EMA. That suggests near term bullish momentum remains intact. And the cross could break 1.2 handle, on its second attempt on one take. (Well yes, it’s actually the second take). With that, we’ll be looking at 61.8% projection of 1.0629 to 1.1832 from 1.1445 at 1.2188 as next target.

              Action bias table also support this view. As seen in D action bias chart, EUR/CHF is maintain solid upside action bias. The neural and two red bars indicated consolidation. And H action bias turned blue again, suggesting pick up in upside bias.

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              China: US Provoking trade dispute is naked economic terrorism, economic homicide, economic bullying

                Rhetorics from Chinese officials regarding trade war with US continued to be hard-line. The ruling Communist Party is clearly preparing their citizens for the “new long march” in prolonged trade war.

                Chinese Vice Foreign Minister Zhang Hanhui said today “we oppose a trade war but are not afraid of a trade war.” He went further to accuse the US that “this kind of deliberately provoking trade disputes is naked economic terrorism, economic homicide, economic bullying.”

                He added: “This trade clash will have a serious negative effect on global economic development and recovery… We will definitely properly deal with all external challenges, do our own thing well, develop our economy… At the same time, we have the confidence, resolve and ability to safeguard our country’s sovereignty, security, respect and security and development interests.”

                Yesterday, stock markets were rocked by news that China is going to weaponize its rare earths in the trade war. The state-run China Daily newspaper said today “it would be naive to think that China does not have other countermeasures apart from rare earths to hand”. “As Chinese officials have reiterated, they have a ‘tool box’ large enough to fix any problem that may arise as trade tensions escalate, and they are ready to fight back ‘at any cost’.”

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                BoJ Kuroda watching US-China trade war with grave concern

                  BoJ Governor Haruhiko Kuroda warned in the post meeting press conference “protectionism could affect not only the countries that are engaged (in trade wars) but the global economy as a whole through supply chains.” He added that the BoJ is “watching developments with grave concern.” For the moment, Kuroda said “it’s hard to say what specific impact this could have”. But he noted “there could be wide-ranging effects, given the complex global supply chain in the world economy.”

                  On monetary policy, he said that “we must maintain our powerful monetary easing given it will take time to achieve our inflation target.” And, if 2% inflation is met, “we won’t be continuing our current unconventional policy”. Also, he commented on the bond market activity since BoJ explicitly allowed 10 year JGB yield to move between -0.1% and 0.1%. He said “bond market trading activity has heightened somewhat… but trading tends to thin in August of each year, so it’s too early to gauge the impact of our July decision.”

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                  Eurozone CPI finalized at 1.7%, core CPI at 1.3%

                    Eurozone CPI was finalized at 1.7% yoy in April, up from 1.4% in March. Core CPI was finalized at 1.3% yoy. The highest contribution to the annual Eurozone inflation rate came from services (0.86%), followed by energy (0.51%), food, alcohol & tobacco (0.29%) and non-energy industrial goods (0.06%).

                    For EU28, CPI was finalized at 1.9% yoy, up from 1.6% in March. The lowest annual rates were registered in Croatia (0.8%), Denmark and Portugal (both 0.9%). The highest annual rates were recorded in Romania (4.4%) and Hungary (3.9%). Compared with March 2019, annual inflation fell in six Member States, remained stable in two and rose in nineteen.

                    Full release here.

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                    Australia AiG manufacturing rose to 54.7, employment and new orders accelerate

                      Australia AiG Performance of Manufacturing Index rose 1.6 pts to 54.7 in September, suggesting faster growth across the sector. Employment and new orders accelerate, driven by continued strength in the ‘food & beverages’ sector along with a resurgence in ‘machinery & equipment’ manufacturing. Manufacturers servicing the mining and defence sectors reported buoyant conditions. Weakness remains in the ‘metals’ and ‘TCF, paper & printing’ sectors while the ‘building materials, wood, furniture & other’ manufacturing sector reported slower conditions.

                      Full release here.

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                      Mid-US update: US stocks make record high, Dollar at critical juncture after steep selloff

                        Dollar suffers steep selling today but it’s trying to regain some ground at mid-US session. Currently it’s trading as the second weakest currency, together with Canadian Dollar. Yen is the worst performing one as fresh selling is seen in US session even against Dollar. On the other hand, New Zealand Dollar was boosted by strongest quarterly GDP growth in two years and is the strongest one. Sterling was lifted by strong retail sales data even though there is no breakthrough in Brexit negotiation in the informal EU summit. Euro follows as the third strongest as German 10 year bund yield once breached 0.50%. But it’s now back at 0.47, thus limiting the strength of Euro.

                        In other markets, DOW and S&P 500 make record highs today while NASDAQ lags behind. US treasury yield is having a notable pull back after this week’s strong rally. It remains to be seen if 10 year yield could eventually breaks 3.115 key resistance. Major European indices ended in black with FTSE up 0.49%, DAX up 0.88% and CAC even stronger and up 1.07%. Gold is back above 1200 but struggles to ride on Dollar selloff to push through 1214.30 resistance.

                        An important point to note is that Dollar is now at a rather critical juncture. EUR/USD is pressing 38.2% retracement of 1.2555 to 1.1300 at 1.1779. GBP/USD is also in proximity to 38.2% retracement of 1.4376 to 1.2661 at 1.3316. We’ve pointed out before that 1.1300 in EUR/USD and 1.2661 in GBP/USD are both medium term bottoms, considering bullish convergence condition in daily MACD. Subsequent rebounds are viewed as corrective in nature.

                        Ideally, we should see strong resistance from 1.1779 and 1.3316 fibonacci level to limit upside, at least on first attempts. This will firmly keep medium term outlook bearish. And then based on the structure of the subsequent fall, we could be able to the possible depth of the next down moves. However, firm break of these two fibonacci levels would open up the cases of trend reversals. Even though the chance of bullish reversal in the pair is still slim in that case, technical forecasts would become more difficult.

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                        EU ready to approve Brexit deal, awaiting UK Commons support

                          There is increasing optimism that a Brexit deal could finally be agreed by UK and EU, as soon as on Thursday. French President Emmanuel Macron said “I want to believe that a deal is being finalized and that we can approve it tomorrow [Thursday].” German Chancellor Angela Merkel also said she is increasingly of the belief” that an agreement would be reached. Earlier, European Council President Donald Tusk also noted “theoretically we could accept a deal tomorrow.”

                          The plan to publish a full legal text ahead of EU summit on Thursday and Friday, however, was put on hold, due to uncertainties on the British side. EU leaders are ready to approve the deal on condition of backing from UK House of Commons, at a special sitting on Saturday. ERG leader Steve Baker said after a backbench 1922 meeting that the deal in the works “could well be tolerable”. But the big question lies in Northern Ireland’s DUP.

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                          UK Q3 GDP growth fastest since 2016, but September weakness clouds

                            UK Q3 GDP growth accelerated to 0.6% qoq, matched market expectations. That’s also the fastest rate since Q4 2016.

                            Head of National Accounts Rob Kent-Smith noted that “The economy saw a strong summer, although longer-term economic growth remained subdued. There are some signs of weakness in September with slowing retail sales and a fall-back in domestic car purchases. However, car manufacture for export grew across the quarter, boosting factory output. Meanwhile, imports of cars dropped substantially helping to improve Britain’s trade balance.”

                            However, it should be noted that the rolling three month growth rate slowed from 0.7% in both May-Jul and Jun-Aug periods. This is in line with the above comment that there were some weakness in September. Indeed, monthly GDP growth in September was at 0.0% mom, missed expectation of 0.1% mom.

                            Full GDP release here.

                            Also released from UK

                            • Trade deficit narrowed to GBP -9.7B in September versus expectation of GBP -11.4B.
                            • Industrial production rose 0.0% mom, 0.0% yoy in September versus expectation of 0.1% mom, 0.5% yoy.
                            • Manufacturing production rose 0.2% mom, 0.5% yoy versus expectation of 0.1% mom 0.4% yoy.
                            • Construction output rose 1.7% mom in September versus expectation of 0.2% mom.

                            Overall, Sterling turns a bit weaker after the batch of data release.

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                            Dollar recovers mildly ahead of Non-farm payrolls, reactions likely temporary

                              Dollar trades mildly higher today but stays mixed for the week ahead of US non-farm payroll report.

                              Markets are expecting 190k growth in non-farm payrolls in June, down from May’s 223k. Unemployment rate is expected to be unchanged at 3.8%. Average hourly earnings are expected to have another month of 0.3% mom growth.

                              Overall, other employment indicators pointed persistently healthy job markets in the US, even though momentum might have slowed a little bit. ADP private employment came in slightly weaker than expected at 177k versus expectation of 180k. Employment component of ISM manufacturing dropped -0.3 to 56.0. Employment component of ISM non-manufacturing dropped -0.5 to 53.6. Initial jobless claims averaged 221.25k in June, staying a ultra-low level historically. Conference board consumer confidence dropped from 128.8 to 126.4 in June but stayed high.

                              Barring any large surprise that deviate drastically from expectation, reactions to NFP should be temporary. Fed is on course for two more rate hikes this year. And, a month or two of data are not going to alter that path.

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                              Trump postpones some tariffs on China as they celebrates anniversary

                                As a gesture of exchange of good will, US President Donald Trump announced yesterday to delay the next batch of tariffs on China by half a month. The imposition of additional 5 tariffs on USD 250B in Chinese imports will be postponed from October 1 to October 15.

                                Trump tweeted: “At the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%), from October 1st to October 15th.”

                                Earlier, China announced to exempt 16 categories of US imports from new tariffs, including some anti-cancer drugs and lubricants, as well as animal feed ingredients whey and fish meal. Trump referred to that separately and said “They made a couple of moves … that were pretty good… I think it was a gesture, okay? But it was a big move.”

                                The moves by both sides are more symbolic than substantial in nature. Yet, it’s a sign that both are working towards to create an easier atmosphere for the expected face-to-face high level trade meeting in Washington next month.

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                                US PMIs dropped, point to slown down to 2.5% GDP growth

                                  PMI manufacturing dropped to 54.5 in August, down from 55.3 and missed expectation of 55.1. PMI services dropped to 55.2, down from 56.0 and missed expectation of 55.9. PMI composite dropped to 55.0, down from 55.7, hit a 4-month low.

                                  Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit said:

                                  “The US economy lost a little pace in August, according to the flash PMI, but continued to grow at a solid rate. The PMI is indicative of the economy growing at an annualised rate of roughly 2.5%, down from a 3.0% indicated rate in July.

                                  “Output, new orders and employment growth all moderated, adding to signs that the economy has cooled after strong growth in the second quarter. Backlogs of uncompleted work, a key indicator of future output and hiring, meanwhile fell for the first time for over a year, suggesting the slowing trend could persist into the fall.

                                  “Manufacturing has led the slowdown, though the service sector has also come off the boil compared to the second quarter highs.

                                  “Some of the slowdown can be attributed to supply shortages: jobs growth in manufacturing and services is being restricted by a lack of available workers, while factories are also constrained by a lack of raw materials, sometimes blamed on ‘panic-buying’ of safety stocks as well as a lack of transportation to ship goods around.

                                  “However, the survey also found increased cases of companies reporting the need to cut costs, in part reflecting the recent steep rise in raw material prices, often linked to tariffs and shortage-related price hikes. Fortunately, input price inflation eased for a third successive month and average prices charged for goods and services rose at a slower rate than July’s post-recession high.”

                                  Full release here

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                                  Dollar dives on US-Mexico Trade Agreement, NAFTA to be replaced, Canada out of the picture

                                    Dollar is sold off broadly as markets anticipated announcement of a certain agreement between the US and Mexico on trade. It was originally thought as part of the trilateral NAFTA agreement. But it turned out to be something that could eventually replace NAFTA.

                                    Trump said that the deal will now be called the United States-Mexico Trade Agreement. He said the NAFTA name will be ditched. He added that the deal is very special for farmers as Mexico will start buying as many farm products from the US as possible.

                                    Meanwhile, Trump said that the negotiation with Canada had not started, adding that if they want to negotiate fairly, the US would do that. Trump also said the US could do a separate deal with Canada, or make it part of the deal with Mexico.

                                    USD/CAD dipped to as low as 1.2952 but quickly recovered as trades realize that Canada is totally out of the picture.

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                                    Canadian Dollar rises mildly after stronger than expected CPI data.

                                      Headline CPI dropped -0.1% mom in December versus expectation of -0.3%. Annually, CPI accelerated to 2.0% yoy, up from 1.7% yoy and beat expectation of 1.8% yoy.

                                      Core CPI readings were steady. CPI core-common was unchanged at 1.9% yoy. CPI core-median dropped from 1.9% yoy to 1.8% yoy. CPI core-trimmed was unchanged at 1.9% yoy.

                                      Full release here.

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                                      UK Rees-Mogg: Change the government or the law, or Brexit will happen on Oct 31

                                        UK Leader of Commons Jacob Rees-Mogg challenged other MPs to collapse the government if they can, as criticism over Prime Minister Johnson’s move to suspend the parliament grew. Rees-Mogg told BBC, “All these people who are wailing and gnashing of teeth know that there are two ways of doing what they want to do… One, is to change the government and the other is to change the law. If they do either of those that will then have an effect… If they don’t have either the courage or the gumption to do either of those then we will leave on the 31st of October in accordance with the referendum result.”

                                        Some EU ministers sang a chorus against no-deal Brexit today as risks grow. Dutch Foreign Minister Stephan Blok said “it’s in nobody’s interest to see a no-deal Brexit,” and, “we still hope it will be possible to avoid a no-deal Brexit and we are looking forward to any proposals from the British government that fit into the Withdrawal Agreement”. Austria’s Alexander Schallenberg said “I fear so, yes,” that a no-de Brexit is more likely. But he also reiterated EU’s stance that “the ball is in the UK’s court… We have done whatever is possible to ensure an orderly exit of Britain.” Finnish Foreign Minister Pekka Haavisto said: “To support Brexit with the deal is a key issue because otherwise we will face a lot of negative consequences to our economies and our border traffic.”

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                                        Position trading update: Entered GBP/USD short

                                          As planned in our weekly report, we entered GBP/USD short today at 1.3150, as the pair recovered to 1.3166. Stop is placed at 1.3300, slightly above 1.3297 resistance.

                                          Our view is unchanged that corrective rise from 1.2661 has completed with three waves up to 1.3297, just ahead of 38.2% retracement of 1.4376 to 1.2661 at 1.3316. Another fall is expected through 1.3042 support to retest 1.2661 low.

                                          There is prospect of resuming whole decline from 1.4376. Hence, if the trade turns out as expected, we’ll monitor downside momentum to decide whether to exit at around 1.2661, or hold through it.

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