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Dazed and confused; Japan declines again

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Dazed and confused

By Arnaud Masset

Lacklustre economic data on both side of the Atlantic has left investors dazed and confused. How to respond to a global slowdown? Buy USD? Take shelter into safe haven assets such as the Japanese yen or gold? Next week’s meeting of the US Federal Reserve could bring light to the darkness. But don’t expect too much: the Fed is already struggling to shrink its balance sheet without triggering a financial crisis. The divergence between short-term and medium-term in risk reversal measures suggests traders have ruled out a Brexit resolution within the next few weeks.

It has been a quiet week in foreign exchange, especially under the circumstances: tension over a US-China trade deal and the endless saga of Brexit. Sterling had a bumpy week as it was left at the mercy of UK lawmakers. Lack of clear direction should increase nervousness, which should move options market – but except for sterling that has not happened. Implied volatilities of options on G10 currencies - across maturities - have consistently moved downward, suggesting that investors do not know where to stand.

Japan declines again

By Vincent-Frédéric Mivelaz

The Japanese economy continues to suffer from China’s economic slowdown and Sino-American trade tensions. So the Bank of Japan voted 7-2 to maintain its policy balance rate unchanged at -0.10% while maintaining its target for 10-year bond yields along zero and annual bond purchases at JPY 80 trillion ($716.32 billion). We do not see any improvement coming. The US-China Trump-Xi meeting initially planned for mid-March has been postponed for 2-4 weeks. Until then, news will be foggy, and Chinese stimulus policies will not kick in until Q3. Currently trading at 111.65, USD/JPY is heading along 111.45 short-term.

Economic headwinds forced the BoJ to revise exports and production downward. January exports dropped -9% (prior: -5.80%), their lowest in three years and the third consecutive drop while imports have rebounded 0.50% (prior: -2.20%) in the same period. There was an unexpected pick up in the January current account balance of JPY 600.4 billion (prior: JPY 452.8 billion) amid a sharp rise in investment income due to an expansion phase in financial markets, yet the drop in January machine orders by 5.40% suggests further slowdown in Q1. BoJ’s change of language from “increasing as a trend” to “recently showed some weakness” shows the situation is not expected to improve until Q3. Assumptions of 2% inflation have now become wishful thinking.

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