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Here we go again, BCB ready to defend the real, Japan falls back into deflation

- Hawkish comments by Fed Yellen pushing USD further up against major currencies
- USD/NOK may further weaken as the Norwegian central bank leaves the door wide open for further rate cuts, arguing that the economy is getting severely hit by persistently low crude oil prices
-  Japan, back in defationary territory, is running out of steam and seems unable to return to growth without an extra push from the central bank
- Shinzo Abe states his ambition to increase the size of the Japan’s economy to 600 trillion yen from the current 490 trillion yen
-  We therefore expect the BoJ to increase the size of stimulus at its annual meeting in October, although there is a huge question mark over the ability of the Japanese central bank to accomplish its mandate
- We remain bullish USD/JPY on the medium-term, however would not rule out a temporary strength of the JPY in the short-term
-  The Brazilian real may strenghten further against the USD dollar as central bank said to be ready to use “all instruments” to put an end to the real’s ongoing massive sell-off, eventually using its FX reserves to protect its currency
 
Just like her colleagues from the Federal Reserve, Janet Yellen reiterated her call for a rate hike before the end of the year. To support her view she argued that the recent weakness in US inflation levels comes down to low energy prices and weak import prices due to a strong dollar. That was all it took to wake dollar bulls up. The dollar index jumped 0.41% to 96.30 as the single currency suffered the biggest sell-off among the G10 currencies. EUR/USD dropped 0.65% before stabilising around 1.1170. Janet Yellen also added that she was confident that inflation will return to 2% over the next few years and that, therefore, the prudent strategy is to start increasing rates gradually before reaching the Fed’s target.
 
Yesterday morning, USD/NOK jumped 2.72% to 8.50 as the Norges Bank cut the deposit rate by 25bps to 0.75% on growth concerns. Moreover, the Norwegian central bank left the door wide open for further rate cuts, arguing that the economy is getting severely hit by persistently low crude oil prices.
 
Japan’s August inflation report was released earlier this morning and it wasn’t pretty. Despite Kuroda’s boundless optimism, Japan falls back into deflation as the country’s core inflation gauge fell 0.1%y/y from 0% a month earlier. After a promising start in 2013, the economy is running out of steam and seems unable to return to growth without an extra push from the central bank. As a result, we anticipate that the BoJ will increase the size of the stimulus at its annual meeting. Also, we are still bullish USD/JPY on the medium-term, however we do not rule out temporary strength of the JPY on the short-term.
 
***Yann Quelenn, Market Analyst, Swissquote: “At a conference held at Tokyo, Shinzo Abe revealed his revised plans to boost the Japanese economy and achieve a GDP target of 600 trillion yen from the current 490 trillion yen. He also discussed how “Abenomics” is currently entering a second stage consisting of structural reforms. To give some examples, this will include the creation of special zones where new businesses will benefit from more deregulated environments. This third arrow is coming alongside the first two “arrows” of fiscal and monetary policy. However the success of the first stage of the must still be brought into question. Indeed, inflation remains very close to zero and consumer spending is weak.
 
This third arrow does not mean that the current policies (monetary and fiscal) will be abandoned. In this regard, Kuroda says he believes that inflation is on a good trend and remains firm. Yet, September’s inflation data came in weak and the country is tumbling back into deflation. The 2% inflation target won’t likely be reached any time soon and we think that monetary stimulus will be stepped up come October. At the moment 12 trillion yen of Japanese government bonds are being bought every month and the Japanese economy still has not shown any specific signs of recovery.
 
There is increasing unease surrounding the BoJ’s ability to accomplish its mandate. The current policy has now gone too far to retreat and yet not a single week passes without Japanese policymakers voicing their optimistic about the economic upturn. We remain bearish on the JPY-complex and don’t see any favorable issue, at least in the medium-term. The inflation forecast will, one way or another, be revised down.”***
 
As a result, Japanese shares rose substantially in Tokyo with the Nikkei and the Topix in dex jumping 1.76% and 1.88% respectively. Elsewhere in the region, Chinese mainland shares kept sliding lower, The Shanghai Composite fell another 1.86%, while its tech-heavy counterpart, the Shenzhen Composite is sending a strong bearish signal as the 50dma crosses the 200dma to the downside. The gauge is down 3.11%. In Hong Kong, the Hang Seng edged up 0.23%, while in South Korea the Kospi index fell 0.22%.
 
The Brazilian real jumped 4.44% against the USD dollar, its biggest rally in seven years, as Governor Tombini said he was ready to use “all instruments” to put an end to the real’s ongoing massive sell-off. USD/BRL fell from 4.2478 to 3.9507 in São Paulo as Tombini and Joachim said that the BCB would use its FX reserves to protect the real.
 
Today traders will be watching annualized final Q2 GDP, Q2 PCE, Markit PMIs and University of Michigan sentiment index from the US.

Friday, 25 Sep, 2015 / 9:13

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Source : http://en.swissquote.com/fx/news-and-live-signals/daily-forex-analysis/2015/09/25

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