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Risk–off in summer trading, BoJ’s Kuroda rules out helicopter money

Risk–off in summer trading, BoJ’s Kuroda rules out helicopter money


- Post Brexit vote risk rally now slowing with the Dow falling for the first time in nine sessions

- Optimism over further ECB and BoJ stimulus has been tempered

- Unsurprisingly, yesterday's ECB meeting provided no unexpected events and though Draghi sounded ready to act, he asserted his willingness to hold fire with a view to reviewing policy in September

- JPY found strength in BoJ comments about helicopter money, despite Governor Kuroda declaring that such action is not on the agenda and not even a possibility

- Despite the official line, the market continues to be confident about the addition of further stimulus, especially as QE has failed and is now reaching its limit.

- We expect further easing at the next meeting, at the end of this month when the government should announce a yen 20 trillion (around$ 180 billion) fiscal stimulus package 


The risk rally, which followed the UK referendum, has slowed a bit as the Dow fell for the first time in nine sessions. Optimism over further stimulus from the ECB and BoJ was tempered slightly while questions over equity valuations forced investors to hit the pause button. Meanwhile, events in Turkey have fuelled a steady sell-off of Turkish assets and an avoidance of the broader EM complex. In the ECB policy meeting Draghi sounded ready but nevertheless willing to postpone further easing. In Japan, the speculation of impending “helicopter” money took a hit as an old BBC interview had the BoJ’s Kuroda apparently ruling out the extreme policy action. In response, the Nikkei fell -1.25% (gap down at open) pulling Shanghai and the Hang Seng lower. FX was mixed with the USD gaining broadly against EM currencies. USDJPY traded marginally higher to 106.26 on the Nikkei Asia Review headline that the Japanese composite stimulus package at the 28th-29th July policy meeting could reach JPY30trn. Yet ahead of the G20 meeting in Chengdu as well as the FOMC and BoJ meeting, traders remain cautious, with USDJPY quickly retracing earlier gains. Elsewhere, Japan's manufacturing sector remained in contraction territory as manufacturing PMI rose to 49 in July from 48.1 in June. 


Yann Quelenn, market analyst: “BoJ’s Kuroda rules out helicopter money: The yen strengthened yesterday on comments by BoJ Governor Kuroda that helicopter money is not on the agenda. Japan’s constitution in fact prevents the central bank from using such stimulus. In any case no one is fully aware as to what exact form such a measure would take. Would it involve the issuing of perpetual bonds or even the distribution of actual cash to Japanese citizens?


Despite financial market disappointment, the Nikkei has not suffered from these comments. We believe that whatever officials are saying, markets remain confident that further stimulus will be added. In other words, if it is not helicopter money, it will be something else. The fact remains that Japan is running out of options and will be obliged to, at least experiment with this monetary tool. Quantitative easing has failed and is now reaching its limit. The next logical step to stimulate the economy is helicopter money. Japan needs inflation, at least to kill its massive debt. It seems contradictory to be reluctant to use this new tool knowing that massive stimulus was pumped into the economy over the course of the past decade with no decent results to show for it.


Until the next steps are clarified, Japan will of course continue to stimulate its economy. We expect further easing at the next meeting to be held at the end of this month. The government should announce that a yen 20 trillion (around $180 billion) fiscal stimulus package will be implemented. The huge current monetary stimulus of yen 80 trillion stimulus has not supported a pick up in inflation - in fact, inflation forecasts are now skewed to the downside. As a result, Japan recently slashed its projections on the belief that consumer inflation will not go higher than 0.4% for fiscal 2017. It seems that the same old saga continues for Japan. Why expect different results when the method does not change?” ---


Overall, G10 currencies remain subdued with little directional momentum. Commodities traded lower, with oil slipping to $44.40brl, pulling commodity-linked currencies down.  On this summer Friday, we suspect volume will remain thin with price actions respecting near-term trading ranges.


In an uneventful ECB monetary policy meeting yesterday, policy remained unchanged. Mario Draghi, provided no surprises and sounded ready to act but willing to hold fire with a view to reviewing policy in September. With the true extent of the Brexit fallout still unclear, and the Euro on the weaker side (due to renewed expectations for a September Fed rate hike), the central bank is under no real pressure to act. However, given the softness of growth data and the mounting risks to the inflation outlook, we suspect that the September meeting will announce a time extension of QE and an expansion of parameters for eligible assets of QE. EURUSD bounced around 1.1060 and 1.0980 but settled at the mid-point. With our expectation for additional ECB easing and growing speculation of a September Fed hike EURUSD faces further downside risk. We remain bearish on EURUSD as upside should be limited by 21d & 200b MA located at 1.1074.


This weekend the world’s finance ministers and central bankers will meet in China. Key topics on the table will include the effectiveness of policy including QE and negative rates as the focus will have increasing shifted to fiscal policy. It goes without saying that the subject of Brexit will also loom large and potential economic challenges will dominate discussion. Yet despite talk over collaborative policy development we don’t anticipate any meaningful progress.


With a light economic calendar summer trading should be in full effect. In the European session Euro area `flash` PMI will be released. Markets anticipate erosion across the board as economic conditions across Europe soften and the outlook due to Brexit dims. `Flash` PMI composite should decline to 52.5 from 53.1, dragged downs by a sharp fall in manufacturing (expected to decline into contraction territory at 48.7 from 52.1). There are no tier 1 events or economic releases in the US session.

Friday, 22 Jul, 2016 / 9:02

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