Pivotal BoJ up tonight, US data eyed later in the week Pivotal BoJ up tonight, US data eyed later in the week Pivotal BoJ up tonight, US data eyed later in the week

Pivotal BoJ up tonight, US data eyed later in the week

Forex
John Hardy

Head of FX Strategy

I am back from a three-week holiday today and a look around the currency market shows a remarkable lack of volatility in much of the G10 space outside of JPY crosses – more on that below as we await a possibly pivotal Bank of Japan meeting tonight.

Elsewhere, emerging markets have rallied as global risk appetite has recovered and EM credit spreads have improved dramatically. Providing an interesting counterpoint to this EM development is China’s devaluing of the CNY, which maintains an impressive pace even as Chinese officials recently dusted off claims that they won’t pursue a devaluation policy.

The week ahead

Bank of Japan tonight: last week’s jump in Japanese government bond yields garnered considerable attention on reports citing official BoJ sources that the Bank is planning possible tweaks to its policy regime. The argument is that nothing the BoJ has done has brought the inflation target into view and that the largely flat yield curve out to 10 years (where the Bank effectively maintains a 10-12 basis point “ceiling”) is bad for the financial sector – i.e. may limit credit to the economy.

Remember that it was ironically the 10-year’s collapse well below 0% that first prompted the Bank of Japan to implement the yield curve control policy in 2016. The BoJ was forced to mobilise unlimited purchases of JGBs last week to defend the 10-year yield ceiling around 11 basis points and any move to loosen up its commitment to that ceiling could trigger at least a chunky one-off gapping move in global bond markets that would prove JPY-positive and likely risk-negative for global markets.

Whether the BoJ tweaks policy or not, none of the potential policy options are likely to move the needle for the Japanese economy or inflation.

Chart: USDJPY

USDJPY has traded down in the pivotal 110.50-111.00 zone ahead of a potentially significant central bank meeting, where a gap risk is large on any notable policy tweak from Kuroda and company could quickly take the pair down through the last short-term supportive zone just below 110.00.

The Bank of Japan detests volatility, but when a ceiling-like situation is in play, it is difficult for the BoJ to avoid an either-or setup (large gapping move) for long-dated JGBs and the yen.

JPY
Source: Saxo Bank

FOMC on Wednesday: the FOMC meeting this week is not much of a focal point given the recent chance for Powell to thoroughly air his thoughts at the semi-annual testimony before Congress. But certainly any new language twist in the monetary policy statement could trigger sharp moves in the dollar. A September rate hike is priced at around 80% probability.

Bank of England Super Thursday: a defensive rate hike on the way from the BoE this Thursday that is almost completely priced in, but guidance from Carney and company should prove very cautious as the unknowns of the Brexit process will increasingly define the sterling outlook for the coming seven months into the March 2019 deadline.

US jobs data and inflation: US inflation data since over the last data cycle have largely been met with a shrug of the shoulders. The core and headline June CPI inflation data released last week inched up another 0.1% as expected and the June Average Hourly Earnings data failed to surge to new highs. This week we get a look at the Fed’s favoured PCE inflation for June on Thursday and then the US jobs and earnings data for July on Friday. The core PCE inflation reached the 2.0% level (rounded up from 1.955%) in May for the first time since early 2012 and is expected at 2.0% again.

We are keeping an eye on the CNY. China’s persistent CNY weakening has garnered little concern this time around despite the rather large magnitude and persistence of the drop. The market seems to be assuming that China will make good on its word to not devalue and nothing is yet broken on the CNY charts, most importantly the USDCNY chart.

A move through 7.00 on that cross would begin to erode those complacent assumptions.

Elsewhere, current levels for the CNY are already significant. EURCNY is poised at the highs of the range since 2014, and China’s own official CFETS RMB basket is within a percent of the lowest weekly level posted back in May of 2017.

Upcoming Economic Calendar 

   • 0830 – UK Jun. Mortgage Approvals
   • 0900 – Eurozone Jul. Confidence Surveys
   • 1200 – Germany Flash Jul. CPI
   • 1400 – US Jun. Pending Home Sales
   • 1430 – US Dallas Fed Manufacturing Survey

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.