- Governor Kuroda confirms more easing possible in terms of quantity, quality or rate
- In our view, there is not much room left for the central bank to act other than increasing the money waterfall
- Strong likelihood that further easing will be announced at next BoJ meeting in April
- Ironically, since entering negative territory on January 29, the USDJPY has lost almost 5% as Japan remains a safe haven despite its massive debt
- Commodities: Investors starting to wonder whether the massive rally that started in January is about to end
- Word on the street: Current price levels of commodities, ranging from copper to oil, are not justified by demand and will therefore have to adjust lower
As expected, the Bank of Japan left its policy unchanged at -0.1% as the market still needs to adapt to this new environment of negative interest rates. However, the absence of inflationary pressure suggests that the BoJ will have no choice but to take another step towards monetary easing to try to revive fading inflation expectations. The Japanese yen reacted positively to the news as USD/JPY fell to 113.30 after swinging between 114.14 and 113.22. The closest support and resistance can be found at 112.16 and 114.87 respectively. On the equity side, the Nikkei was down 0.68%, while the broader Topix index fell to 0.57%.
Yann Quelenn, market analyst: "Obviously the BoJ is now thoroughly weighing up the full effects of negative interest rates on the economy. At the press conference, policymakers maintained that recent economic weakness comes down to the slowdown of emerging economies. Governor Kuroda added that more easing is in fact possible in terms of quantity, quality or rate. In other words, the BoJ is now more than ever all-in and this policy shows that there is not much room left for the central bank to act other than increasing the money waterfall. A new sales tax increase, following the one from 2014, has now been postponed to next year. The BoJ simply cannot implement such measures for the time being and so to us, this latest announcement represents nothing more than a simple verbal intervention. However, 2017 also seems way too soon to raise sales tax, especially as the negative impact the first one had two years ago is still fresh in our minds. The next BoJ meeting will be held on April 28 and we feel there is a strong likelihood that further easing will be announced. At this stage of the game Japan has no choice but to keep going down this path. There is no way back. Inflation is still the key issue for the Japanese central bank and in our view there is no chance that the 2% target will be achieved before the end of Kuroda’s term. Ironically, since entering negative territory on January 29, the USDJPY has lost almost 5% on global concerns and low oil prices. Japan remains a safe haven despite its massive debt. Confidence in the central bank seems way more important for financial markets than owning massive debt.” --
The small equity sell-off wasn’t contained within Japan with Asian regional markets also trading in negative territory. Hong Kong’s Hang Seng fell 0.64%. In mainland China the Shenzhen Composite slid 0.93%, while in Shanghai shares edged up 0.17%. South Korean shares slid 0.12%, in Taiwan the Taiex fell 1.56% and in India, the Sensex settled down to 0.75%. We see this small market correction as necessary, especially given the sharp increase of the previous days.
In the commodity complex, investors are not in a laughing mood and are starting to wonder whether the massive rally that started in January is about to end. Indeed, word on the street is that the current price levels of commodities, ranging from copper to oil, are not justified by demand and will therefore have to adjust lower. Overnight, iron ore future contracts on the Dalian commodity exchange - for delivery in May - were down 3.34% to 419.50 yuan/metric ton. Copper futures fell 1.10%, Aluminium was down 0.53%, while WTI slid 1.26%.
As a result, commodity currencies were experiencing a sell-off this morning. The Canadian dollar was down 0.69% against the greenback as WTI returned to $36.70 a barrel. The Australian dollar was also under mounting selling after the debasement of iron ore and crude oil. AUD/USD fell to 0.7470, down more than 1% since Monday. The Aussie will find a support area at around $0.74 (psychological threshold), while on the upside, a resistance can be found at 0.7594 (high from March 14th), then 0.7849 (high from January 15th).
EUR/USD treads water at around 1.11 as the market awaits February’s retail sales and PPI figures, due to be released later this afternoon. Sales are expected to have contracted 0.2%m/m, while market participants expect producer prices to shrink 0.2%m/m in the second month of the year. The market is relatively bearish dollar, so a good read of those two indicators could wake up dollar bulls.
Today traders will be watching CPI from Sweden and Italy; retail sales, PPI and Empire manufacturing from the US.