Kuroda hints at further easing
(Yann Quelenn, market analyst)
The days of ultra-loose monetary policy are not over for Japan. At the Japanese Parliament BoJ Governor Kuroda stated that the target rates for bonds could be lowered as the economy is not really showing signs of improvement. In reality it rather seems that the Japanese economy has been operating at full capacity for many years but that the economy is proving far too difficult to stimulate.
The inflation target of 2% does not look attainable. Japanese policymakers have a close eye on the Fed and are certainly secretly hoping that US officials raise rates several times this year to provide some needed downside pressure on the yen. It is worth noticing that current demand for the dollar against the yen remains stable.
Kuroda’s comments remind us of the fact that there is actually not much that the BoJ can do. The institution is running out of ammo and the past decade’s monetary policy has only served to cause debt to skyrocket.
We believe that entering into the risk-on period with a true global recovery would offload some of the pressure from the country. However, the world has rarely been so unstable. We are not ruling out the possibility that the yen will serve this year as a safe haven. Between the rock and the hard place that is Trump and European political uncertainties, the Japanese currency has definitely room for further strengthening.
Unlikely CPI provides USD boost
(Arnaud Masset, market analyst)
Global equities and the US dollar rallied yesterday amid Janet Yellen’s appearance before the Senate Banking Panel. The S&P 500 rose 0.40% to 2,337 points while the dollar index jumped 0.65% to 101.30. The Fed Chair’s remarks were in the same vein as the last FOMC statement as she reiterated that the time for another rate hike is coming; however she but did not provide any hints regarding the timing. The market, once again, has interpreted its comments as being hawkish, while in our opinion she is simply slowly starting to prepare the market for the next hike. According to the Fed funds futures, the probability of a rate hike at the March meeting has climbed above 50%. Nevertheless, we believe that the uncertainty generated by the Trump administration, together with overestimated inflation expectations will force the Fed to proceed slowly and cautiously.
The January inflation report that is due for release later today will therefore be key in assessing whether a March move is underway. The headline measure is expected to have increased 2.4%y/y in the first month of the year (2.1% in December), thanks to rising energy prices. On the other hand, the core measure that excludes the most volatile components is expected to have eased to 2.1%y/y from 2.2% previous reading. We do not expect a strong read for this month due to the lack of solid momentum in personal consumption and recent investment. Therefore, the risk is mostly on the downside in USD today as the risk of disappointment is quite substantial. Moreover, retail sales are expected to have suffered from the January lull.