BoJ Struggles To Control The Curve

News and Events:

BoJ struggles to control the curve

Today’s movement in Japanese sovereign rates is a clear case of markets testing the BoJ’s commitment to sustainable monetary policy, just days after they reaffirmed their total commitment to the strategy. In order to boost the weak Japanese economy, the BoJ has gone beyond negative interest rates and quantitative easing and into yield curve control. Generally, central bank policy is limited to the short end of the curve but the fearless BoJ has ventured out to 10 years in order to control the steepening of the yield curve. The BoJ has committed to keep out to 10 years between -.10% and zero. In our view, this desperate attempt indicates central bank exhaustion rather than policy innovation. Following a smaller than expected bond purchase operation of jpy450bn 10-year, JGB sold off peaking at 15bp (above +/-10bp range from zero target). The BoJ quickly stepped back into the markets with unlimited purchases pushing rates back into the top of the target range. USDJPY reacted accordingly, swiftly dropping to 112.51 before the BoJ stabilised prices, sending the pair back towards 113.20. Much of the JPY weakness is defined by a weakness in JP rates (in US-JP yield spread relationship), therefore volatility in JGBs will have traders questioning the BoJ’s long-term strategy and policy sustainability. We continue to see JPY grinding higher as US rates stagnate. However, in the short term, investors will focus on US President Trump and PM Abe’s meeting next week. Foreign relations remain uncertain and accusations over FX manipulation will make this a headline-packed event.

China tightens policy

China’s Caixin PMI Manufacturing came in at 51.0, marginally below expectations of 51.8. The reading, which focused on smaller corporates, had limited embedded information. Elsewhere, following the increase in the mid-term leading facility rates prior to the Lunar New Year’s holidays, the PBoC today hiked the short-term market interest rate. The PBoC increased the reverse repo rates and rates on funds lending in SOF. This tightening action was initiated to offset sustained capital flight and the growth asset bubble. Higher rates in the short and medium term should lessen selling pressure on CNY and ease, but not stop, capital outflows. The recent disappearance of a prominent Chinese businessman in Hong Kong has highlighted investor discomfort with current Beijing policy, protracting steady capital migration out of China.

NFPs release will be non-event for dollar (by Yann Quelenn)

Today is the first nonfarm payrolls of the year. The week was busy and the Fed left rates unchanged as was much expected. Over the last year, we have witnessed financial markets shift their attention from economic data to central banks and now, Donald Trump. Every one of his tweets has the potential of changing market expectations and asset pricing as all eyes scrutinise his every move. This is why the dollar should not move much today amid the release of the jobs data.

The strong January ADP report on Wednesday, which rose 246k in January, is driving expectations higher. Markets expect today’s NFPs to indicate an additional 180k jobs and that the unemployment rate remains steady at 4.7%.

As Trump has mentioned several times, growth is one of his main concerns. A good read today would confirm the ongoing momentum of the US economy but this is in no way a reflection of his policies. It is worth saying that economic data in Europe and Japan has shown a solid trend of improvement over the last six months. Global environment conditions are improving.

Today’s Key Issues (time in GMT):

• 4Q UBS Real Estate Bubble Index, last 1,35, rev 1,34 CHF / 07:00
• Jan Swedbank/Silf PMI Services, exp 59, last 59,9 SEK / 07:30
• Dec Industrial Production MoM, exp 0,50%, last 1,20%, rev 1,10% SEK / 08:30
• Dec Industrial Production NSA YoY, exp 2,70%, last 0,10%, rev -0,10% SEK / 08:30
• Dec Industrial Orders MoM, last 0,00%, rev 0,50% SEK / 08:30
• Dec Industrial Orders NSA YoY, last -3,10%, rev -2,80% SEK / 08:30
• Dec Service Production MoM SA, exp 0,50%, last 0,40% SEK / 08:30
• Dec Service Production YoY WDA, exp 1,50%, last 3,70%, rev 3,50% SEK / 08:30
• Jan F Markit Eurozone Services PMI, exp 53,6, last 53,6 EUR / 09:00
• Jan F Markit Eurozone Composite PMI, exp 54,3, last 54,3 EUR / 09:00
• Jan Unemployment Rate, exp 3,20%, last 2,80% NOK / 09:00
• Jan Markit/CIPS UK Services PMI, exp 55,8, last 56,2 GBP / 09:30
• Jan Markit/CIPS UK Composite PMI, exp 56, last 56,7 GBP / 09:30
• Jan Official Reserves Changes, last 2,90E+07 GBP / 09:30
• Dec Retail Sales MoM, exp 0,30%, last -0,40% EUR / 10:00
• Dec Retail Sales YoY, exp 1,80%, last 2,30% EUR / 10:00
• Norway Jan. House Price Statistics NOK / 10:00
• Revisions: Establishment Employment Survey Data USD / 13:30
• Jan Change in Nonfarm Payrolls, exp 180000, last 156000 USD / 13:30
• Jan Change in Private Payrolls, exp 175000, last 144000 USD / 13:30
• Jan Change in Manufact. Payrolls, exp 5000, last 17000 USD / 13:30
• Jan Unemployment Rate, exp 4,70%, last 4,70% USD / 13:30
• Jan Average Hourly Earnings MoM, exp 0,30%, last 0,40% USD / 13:30
• Jan Average Hourly Earnings YoY, exp 2,80%, last 2,90% USD / 13:30
• Jan Average Weekly Hours All Employees, exp 34,3, last 34,3 USD / 13:30
• Jan Labor Force Participation Rate, last 62,70% USD / 13:30
• Jan Underemployment Rate, last 9,20% USD / 13:30
• Jan F Markit US Services PMI, last 55,1 USD / 14:45
• Jan F Markit US Composite PMI, last 55,4 USD / 14:45
• Jan ISM Non-Manf. Composite, exp 57, last 57,2, rev 56,6 USD / 15:00
• Dec Factory Orders, exp 0,50%, last -2,40% USD / 15:00
• Dec Factory Orders Ex Trans, last 0,10% USD / 15:00
• Dec F Durable Goods Orders, last -0,40% USD / 15:00
• Dec F Durables Ex Transportation, last 0,50% USD / 15:00

The Risk Today:

EUR/USD‘s momentum has increased sharply. Closest hourly resistance area is given at around 1.0800. Hourly support lies at 1.0590 (19/01/2016 low) and 1.0341 (03/01/2017 low). Expected to see continued consolidation. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity

GBP/USD‘s buying pressures are increasing despite ongoing consolidation. The pair is on the road towards 1.2771 (05/10/2016 high). The technical structure is still anyway showing positive potential. Hourly support is given at 1.2466 (30/01/2016 low). Expected to show further bullish move. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY had surprisingly exited the downtrend channel after monitoring resistance implied by the upper bound. Hourly resistance is given at 115.62 (19/01/2016 high). The technical structure suggests further momentum. as the break of hourly support given at 112.57 (17/01/2017 low) has confirmed bearish pressures. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF’s momentum is definitely bearish. Key resistance is given at a distance at 1.0344 (15/12/2016 high). The road is clearly wide-open for further decline. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.