- Japan index and currency may move further south after BOJ gives bearish signal on economic outlook
- Chinese home prices improvements indicate that housing market recovery continues
- Stability in housing prices will be key to our China economy recovery story in 2016
- Canada, we are expecting to see one more rate cut in 2016
- We remain bearish on Yen targeting 125 against Usd in the medium term
In a surprise move the Bank of Japan announced a modification of its qualitative and quantitative easing programme. The size of the programme will remain unchanged, at ¥80 trillion per year, but the average maturity of bond holdings will be extended to 7 to 12 years, while a new programme for the purchase of ETF will be created. Initially, USD/JPY jumped to 123.56 amid the announcement before moving lower to 121.86. In the sovereign bond market, the 10-year yield dropped 25bps to 0.27% while the 30-year dropped 40bps to 1.30%. On the equity side, the Nikkei rose as much as 2.70% before heading into negative territory and closing down 1.90% as investors interpret the BoJ’s move as a bearish signal regarding Japan’s economic outlook.
***Yann Quelenn, Martket Analyst: “The Bank of Japan has kept its monetary base unchanged for 2016, which will remain at the annual pace of 80 trillion yen. Nevertheless, the average maturity of its Japan government bond holdings will be increased to 7-12 years from 7-10 years and the central bank has surprised financial markets by announcing Exchange Traded Funds purchases will be increased. Under this new program, the BoJ will buy ETFs at an annual pace of yen 300 billion. For the time being, ETF purchases account for around yen 3 trillion.
Kuroda tried to show confidence in the Japanese economy after recent data (business confidence, capital spending) have been released above expectations. We believe that the BoJ, despite this attitude, is only trying to find more ways to stimulate the economy as the current program is clearly not sufficient. The era of free money will continue and except for recent positive data such as improved business confidence, we have the impression that the BoJ is entering an all-in stage. The truth is that “Abenomics” is failing and confidence in the economy should not be mixed up with the results that this economy is providing. We remain bearish on the Japanese currency and target the yen 125 against the greenback over the medium-term.”***
China‘s November homes prices rose 0.3% m/m (0.9% y/y) from 0.2% (0.1% y/y) in October indicating that the housing market recovery continues. Following policymaker’s decision to launch extensive easing measures, today’s data indicates that general improvements in prices are now spreading to smaller cities. Of the 70 cities tracked 33 saw new home prices increase compared with only 27 in October. In major cities such as Beijing, Shanghai and Shenzhen prices remain firm. Stability in housing prices will be key to our China’s economic recovery story in 2016. PBoC fixed USD/CNY 57pips higher, at 6.4814 continuing the trend of higher highs.
The greenback had a tough night as investors sold the US dollar, reversing previous days’ gains. The USD fell 0.65% versus the Japanese yen, 0.51% against the Swedish krone and 0.32% verse the Danish krone. The dollar index dropped 0.55% from yesterday high. Asian equity indices are broadly lower on this final day of the week as sell-off in energy prices weighs on risk-on sentiment. In Hong Kong the hang Seng fell 0.27%, while in Mainland China the Shanghai and Shenzhen Composites were down 0.03% and 0.28% respectively. Elsewhere, Australian shares edged higher 0.09% and the Kiwi equity market was up 0.32%. Asian emerging markets, who are in the front line when sentiment worsens, recorded the heaviest losses. Thailand’s BGK index fell 1.40%, Jakarta Composite index was down 1.65%, Indian Sensex dropped 0.80% while the Taiex was down 0.75%.
With today’s light economic calendar, traders will be watching Canada CPI with interest. Overall inflation measures should stay firm due to base effects and a likelihood of decrease in 1Q 2016. Markets are expecting headlines CPI to rise a meager 0.1% m/m yet climb to 1.5% y/y from 1.0% (core CPI m/m is expected to drop to 0.0% from 0.3%). Our expectation is that disinflationary headwinds will continue, we expect to see one more rate cut in 2016. The lingering effects of lower oils is wreaking havoc on growth and inflation outlook (not to mention threat of rising credit defaults), while the dovish Fed hike suggests the upside in USD will be limited (rate differential spreads near widest). The lack of further exchange rate support will keep the BoC vigilant.