- BoJ may increase QE as early as October
- RBA said downside risks are increasing because of international economic outlook but too early to assess how much they will affect Australian GDP
- GBPUSD under pressure ahead of August inflation report may head to 1,5373
- Brazil S&P downgrade allows government to propose a new round of austerity measures
USD/JPY was trading substantially higher in early Asian session amid speculations concerning the expansion on the quantitative easing program by the Bank of Japan. However, Governor Kuroda announced that the BoJ will maintain the stimulus at ¥80tn per year despite a weak inflation outlook and anemic growth. We think it’s only a matter of time before the BoJ increases the size of the stimulus with October being our best guess. As a result of the comment, USD/JPY lost previous gains and quickly returned to ¥120. The pair is trading right in the middle of its short-term range, between the resistance and support lying at 121.75 and 118.61, respectively. The Nikkei is up 0.80%, while the broader Topix index rose 0.34%.
*** Yann Quelenn, Market Analyst: “Annualized Japan Q2 GDP shrank -1.2% y/y, despite the huge stimulus provided by “Abenomics”. At yesterday’s Bank of Japan meeting there was an 8-1 vote to maintain the current level of stimulus. Hence, the increase of the monetary base will continue at the current pace of 80 trillion yen per year. Today, all eyes will be on Governor Kuroda watching for any hints that indicate monetary base expansion, which we consider to be a distinct possibility. Consumer spending is still at a low level and the inflation gauge is at zero. On top of this, the 2% inflation target seems unreachable in the current economic conditions. Nevertheless, Kuroda has said that there is a possibility that the BoJ will lower the inflation forecast, adding that this would be due to the drop in oil prices. Yet, we think that oil prices are not the main obstacle in the way of Japan’s recovery. It is becoming increasingly obvious that “Abenomics” is failing to deliver. Lingering low oil prices are only a compounding factor.
On 30th October, the Bank of Japan will release its economic and inflation outlook. It is looking very likely that the BoJ will add more stimulus. Lawmaker Kozo Yamamoto said the monetary base should be expanded by 10 trillion yen. We now wonder where Japan will stop. With its massive debt-to-GDP ratio of more than 230%, even Japan’s massive unsustainable debt does not prevent the BoJ from continuing to apply the same policy. How long will investors remain confident in the Bank of Japan’s ability and in “Abenomics” to stabilize the economy? We remain bearish on the JPY.”***
The minutes from the RBA’s September meeting were released earlier this morning. As expected, the minutes indicate that the central bank is comfortable with its current monetary policy, i.e. cash rate at 2%. However, the RBA maintained its dovish bias as it declared that “Overall, international economic developments had increased the downside risks to the outlook”, adding that the effects on the Australian economy were still unclear. For now, the central bank is on “wait and see” mode as it is still assessing the consequences of a slowdown of the Chinese economy while waiting on the Fed decision.
AUD/USD is currently testing the upper bound implied by the medium-term downtrend channel while the daily RSI is getting closer to the 50% threshold. If the Fed holds rates on Thursday, it may provide the fresh boost required to break those two strong resistances. In the meantime, we remain bearish on the Aussie.
Elsewhere, Chinese mainland shares are extending losses for the second straight day. The Shanghai Composite is down 2.47%, while the Shenzhen Composite printed a 7-month low at 1,575.95, down 3.18% on the session. In South Korea the local gauge edges higher by 0.14% while in Hong Kong, the Hang Seng declines -0.27%.
Overnight, the US dollar gained ground against most G10 currencies. EUR/USD is back around 1.13 after testing the resistance lying at 1.1368 (Fib 38.2% on July-August rally) and is heading to the support standing at 1.1262 (Fib 50%). GBP/USD is also taking a breather after the previous day’s strong gains; the pair is under pressure this morning ahead of August’s inflation report. A support can be found at 1.5373 (September 14th low), then 1.5339 (September 10th low).
In Brazil, in the wake of Brazil’s credit downgrade to junk, Joachim Levy has proposed a new round of austerity measures aimed at cutting expenses and raising taxes. Dilma Rousseff’s government hopes to trim BRL 26bn of expenses in 2016 while increasing tax revenue by BRL 28bn. As a result, the BRL appreciated 1.61% against the EUR and 1.45% against the USD. This downgrade by S&P is a blessing for Joachim Levy as it will help to convince lawmakers and will sweeten the pill of austerity for Brazilian people.
Today traders will be watching current account balance from South Africa; inflation report (CPI and PPI) from UK;ZEW survey from Germany; retail sales, empire manufacturing, industrial production and capacity utilisation from the US; tax collection and formal creation from Brazil.