- Japan: Disappointing inflation data and Brexit consequences are building the case for more BoJ stimulus
- We maintain our position that the BoJ will further ease at its July meeting
- Data suggests that the Chinese economy is losing momentum again after the past few months of encouraging signs
- We expect the Chinese government will gear up the implementation of measures aimed at stabilising the economy, while the PBoC will most likely have to adopt a more balanced approach in order to limit capital outflows
- EURUSD: We do not expect significant moves in the short-term as the effects of Brexit are being discounted, although the release of next week’s NFP and the minutes of the June FOMC meeting could trigger some sharp moves
Overnight, the Japanese yen was the best performer among the G10 complex. The JPY surged roughly 0.49% against the USD dollar amid better-than-expected inflation figures and the Tankan report. However, the headline CPI kept sliding in May as it contracted 0.4%y/y after a contraction of 0.3% in the previous month but beat the median forecast of -0.5%. The core gauge, which excludes fresh food and energy, matched expectations and printed at 0.6%m/m, below last month’s reading of 0.7%. The disappointing inflation data, which came on the back of weak industrial production coupled with lacklustre retail sales released earlier this week, are building the case for more BoJ stimulus. Moreover, the UK’s vote to leave the EU has bolstered the demand for the yen, putting the faltering recovery at risk and dampening the inflation outlook. USD/JPY dropped to 102.68 in Tokyo after testing 103.39 before the release of the inflation data. We maintain our call that the BoJ will further ease its monetary policy at its July meeting.
Yann Quelenn, market analyst: Japan: data still on the soft side: The USD/JPY dropped below 102 overnight against the greenback as the US Treasury dropped and consequently pushed the dollar downward. This is in spite of the Japanese data released overnight, which came in on the soft side. The National CPI and the Tokyo CPI are still negative on an annualised basis - weighed down by Food and Energy. The BoJ’s inflation target looks further and further away. Consumer spending continues its decline, despite a better labour market as well as the fact that the overall household spending shrank -1.1% in May from -0.4% a month before. The Manufacturer’s confidence given by the Tankan Survey, is more or less in line with previous reports. Yet, the survey was already completed before the Brexit results. On July 10, the election for the Japanese upper house of Parliament will take place. First polls are already showing that Abe will win the majority. Japanese confidence in Abenomics still seems to prevail. However, we believe that his attempt to reflate the economy is a failure, especially with such little growth and no inflation. Currency-wise, pressure on the USD/JPY should continue and we expect more stimulus to be added on the 28th of July at the next BoJ meeting.” ---
In China, the publication of the June PMI reports revealed further divergence between the official and the private survey. Indeed, the official manufacturing PMI printed flat at 50 in June, while the private gauge, the Caixin manufacturing PMI further eased in June, printing at 48.6 versus 49.2 previous reading and median forecast. This is the lowest reading since February this year; we have to go back to February 2015 to find a reading above the 50 threshold that separates expansion from contraction. Finally, the official non-manufacturing PMI came in at 53.7, up from 53.1 in June. All in all, the data suggests that the Chinese economy is losing momentum again after sending some encouraging signs over the past few months. We therefore expect the government to gear up the implementation of measures aimed at stabilising the economy, while the PBoC will most likely have to adopt a more balanced approach in order to limit capital outflows. The PBoC set the daily USD/CNY fixing to 6.6496, up 0.28% from yesterday.
EUR/USD traded slightly lower during the Asian session, sliding to 1.1072 from 1.1117 in the early session. Taking a step back, the pair continued to consolidate at around the 1.11 level, which corresponds to its 200dma. We do not expect significant moves in the short-term as the effects of Brexit are being discounted. However, the release of next week’s NFP and the minutes of the June FOMC meeting could trigger some sharp moves.
Today traders will be watching retail sales and manufacturing PMI from Switzerland; PMIs from France, Spain, Germany, the euro zone, the UK, Brazil and the US; unemployment rate from Russia and the euro zone; industrial production from Brazil; ISM manufacturing and construction spending from the US.