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Japan Inflation Maintains Positive Momentum

Japan inflation maintains positive momentum

Japan August inflation report came in roughly in line with expectations and left investors with no choice but to look abroad for a driver. Headline inflation beat forecast as it rose to 1.3%y/y compared to 1.1% expected and 0.9% in the previous month. However, most of the upside surprise come from the rise in fresh food prices, as the core measure, which excludes fresh food, matched estimates of 0.9%y/y, up from 0.8% in July. Even though it is only halfway to the BoJ’s target, the core measure has been maintaining a positive momentum since April and this trend is set to continue in the coming months.

USD/JPY rose 0.20% to 112.85 this morning amid renewed risk appetite. Equities rose across the board with the Chinese market surging the most, thanks to circulating rumours that China is about to cut import taxes from the majority of its trading partners. The timing of the announce suggests that the move is not only a way to stimulate domestic consumption but also to show the world that the country is of goodwill and continues to open up.

We expect the yen will recovers against the greenback as the BoJ started to reduce its bond purchase program for super-long maturity, while the Fed will most likely slowdown the pace of rate hike.

USD slides ahead of rate hike

The American economy has underwhelmed: the Federal Reserve will raise rates only 0.25% next week. Lack of a steeper hike has taken steam out of the USD rally and given risky emerging markets room to recover. The Turkish lira recovered, despite an inept economic plan. EUR/USD is near the top of the midterm range located at 1.1851. Euro Stoxx 50 futures are up, following the lead of U.S. stocks, which hit other record high, and Asian stocks that followed the US optimism.

US Treasury 10-year yields remain above 3.07%, rising but still historically low. Perhaps the market is mispricing the top of the Fed interest rate cycle. Risk appetite should remain buoyant, even though there are plenty of risks including rising trade tensions, Brexit, October German elections, US mid-term elections, Q4 corporate earnings and general geopolitics. Buy risk and volatility, but trade nimbly.

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