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Tue, 17th January 2017

Anirudh Sethi Report

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Archives of “japanese yen” Tag

BOJ taking ‘a step forward,’ says Kuroda

The Bank of Japan revised its economic outlook for the first time in 19 months during the two-day policy meeting that ended Tuesday. But that is apparently the only step the central bank is taking at this time.

“The headwinds seen in the first half of this year have ceased,” BOJ Gov. Haruhiko Kuroda told reporters following the meeting. Markets were riled by heightened concerns directed at emerging economies at the beginning of 2016, only to be shocked in June by Britain’s referendum to exit the European Union. The BOJ was forced to loosen its policy in July, raising its target for exchange-traded fund purchases.

 During the second half of 2016, the economic landscape has slowly brightened, beginning with U.S. readings. The Japanese economy has followed suit with increased exports and production. Consumption also recovered from a slump caused by a soft stock market and inclement weather at the beginning of the year.

“Japan’s economy has continued its moderate recovery trend,” the BOJ said in a statement published after the meeting. The central bank had previously qualified that view by highlighting sluggish exports and production.

US 10-year yield climbs above 2.5%, stocks mixed

Oil prices surged to their highest level since July 2015 on Monday raising concerns about inflation and helped push the US 10-year Treasury yield above the 2.5 per cent mark.

The yield on the US 10-year, which moves inversely to price, climbed above 2.5 per cent for the first time in two years to 2.5005 per cent.

“The bearishness in the bond market is even more acute than the bullishness on equities,” David Rosenberg at Gluskin Sheff, said.

Alongside energy prices, Peter Tchir at Brean Capital also said the weakness in Japan “is concerning to global bond investors”. He noted the Bank of Japan had pledge in September to keep the 10-year yield on the Japanese government bond at or below zero per cent. Instead, the JGB is now at nearly 0.8 per cent. That “might be an indication of Central Banks losing their ability or willingness to suppress interest rates,” he said.

Despite the run up in oil prices, the S&P 500 was down 0.1 per cent to 2,257.67, while the Dow Jones Industrial Average was flat at 19,760.14 — less than 300 points shy of breaching the 20,000 level. The Nasdaq Composite was down 0.5 per cent to 5,420.70.

Investors appear to be pausing for breathe following the sharp run up in stocks in recent weeks.

US 10-yr Treasury yield hits highest in at least 18 months

The sell-off in government bonds continues, with US Treasuries leading Asian counterparts lower on Monday and ahead of the Federal Reserve’s decision on interest rates later this week.

The yield (which moves inversely to price) on the benchmark 10-year US Treasury rose as much as 2.74 basis points in morning trade today to 2.4949 per cent.

That level is not quite enough to surpass the intraday high of 2.4985 per cent hit on June 11, 2015, but it puts it on track to be the highest closing level since September 2014, which also happens to be the most recent month when yields closed above 2.5 per cent.

Yields on government bonds have galloped higher since Donald Trump won the US election, with markets taking the view his economic policies would spur inflation. That has blunted demand for haven investments, such as Treasuries, the Japanese yen and gold.

More broadly, the inflation outlook in the US has been picking up this year such that markets think the Federal Reserve will be comfortable with lifting interest rates by 25 basis points at their policy meeting on Wednesday, the first increase in a year.

40-year JGB issuance set to hit 3tn yen

Japan’s Finance Ministry is set to boost the issuance of 40-year government bonds to a record 3 trillion yen ($26 billion) in fiscal 2017, betting on strong investor demand.

The issuance of two-year and other short- and medium-term bonds with negative yields will decrease due to low demand.

 The JGB issuance plan for fiscal 2017 will be finalized based on opinions the ministry hears at meetings with brokerages, life insurers and other market players. The meetings are scheduled for Friday and Dec. 19. The plan will be announced along with next year’s budget, which will be endorsed by the Cabinet on Dec. 22.
 It will be the first bond issuance since the Bank of Japan adopted a negative interest rate policy in January. The amount of JGBs issued periodically for institutional investors will decrease for the fourth consecutive year due to a decline in refinancing bonds. While the total issuance will decline, the issuance of superlong-term bonds with positive yields will increase.

The issuance of 40-year bonds will increase for the third straight year, rising nearly fourfold from fiscal 2008, when 40-year bonds made their debut. Investor demand for the 40-year bonds, with their relatively high yields, is expected to be strong. The increase in the issuance of superlong-term bonds might also prevent any uptick in demand for refinancing of short- and medium-term bonds.

Is the Bank of Japan TRYING to Crash the Markets?

Is the Bank of Japan is trying to crash the markets?

This is not conspiracy theory. In the last month the BoJ has devalued the Yen 14% against the $USD.

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By any other measure this is a crash as far as currencies go. And it could lead to MAJOR issues for the financial system.

The last time the BoJ collapsed the Yen this aggressively the ENTIRE commodity markets imploded collapsing over 40%. Oil ended up collapsing from $60 to sub $48 in a matter of weeks.

Dollar Correction may be at Hand, but likely Brief and Shallow

After a three-week rally, the dollar bulls finally showed signs of tiring ahead of the weekend.  Technical indicators have begun rolling over from over-extended conditions. Nevertheless, the dollar’s pullback is limited in time to the first part of the week ahead, and in scope to only modest retracement targets ahead of the US employment data, the Italian referendum, and the Austrian presidential election on December 4. 
We have suggested that the dollar’s advance was fueled by the divergence that had little to do with the US election.  It is clear from Fed comments and the minutes from the November FOMC meeting that officials were prepared to hike rates regardless of the election outcome.  Moreover, subsequent data has been mostly better than expected.   
Trump’s promise of significant fiscal stimulus with the world’s largest economy already grown near or above trend, the inflationary implications are clear.  Nominal rate differentials have widened significantly in US favor.  We are cautious are extrapolating too much from the inflation-linked securities as the liquidity premium tends to exaggerate the movement.  Also, Fed funds futures strip has not fully priced in two hikes next year, suggesting potential room further adjustment.  
Since November 4, a few days before the US election, the Dollar Index rose about 5.35% at last week’s peak just above 102.00.  The RSI has rolled over, as has the Slow Stochastics.  The MACDs may turn next week.  Initial support is seen in the 101.00-101.20 and then 100.65.   

China Warns It Is Ready To Slow Yuan Plunge On Capital Outflow Fears

It was just one year ago when the biggest worry for the market – which culminated with a near 10% S&P correction in in early 2016 – was the daily plunge in the Yuan driven by the surging dollar, which in turn prompted China to engage in an unprecedented reserve liquidation (in which it sold both government bonds and equities), leading to a daily selloff in risky assets on days when the Yuan was fixed lower.

Fast forward a year later, when the US Dollar has blown through last year’s highs and is now at levels not seen since 2003, the Yuan is trading at record lows, just shy of 7.00, and yet stocks stubbornly ignore the one catalyst that led to so much headache for the bulls one year ago.

 In his daily note, RBC’s cross-asset strategist Charlie McElligott points out that while the market may be oblivious, what is taking place in China is something to be concerned about:
 ONE IMPORTANT TACTICAL MACRO POINT WITH REGARDS TO THE NEAR-TERM DIRECTION OF USTs / GLOBAL LONG-END: The yuan ‘slow bleed’ devaluation by the PBoC versus the USD seen since the start of October has without question been tied to at least some of the weakness in the US long-end, as the central bank sells USTs to try and mitigate the depreciation of the yuan against the SDR basket—see here:

Japan inflation already above BOJ target, at least for luxury items

Japan is known for its persistent deflation. Despite the Bank of Japan’s best efforts, consumer prices are again on a downward trajectory. But for high net worth individuals, the situation is totally different, according to a new report by the private Swiss bank Julius Baer.

Excluding fresh foods, consumer prices in Japan dropped 0.5% in September from a year earlier. It was the seventh consecutive month of decline and far short of the BOJ’s target of 2% inflation.

 But “if you are a high net worth individual, your lifestyle on average increased by 2.4% in cost in 2016,” said Stefan Hofer, head of business development at Julius Baer Wealth Management. “If you look at luxury hotels, if you look at business class travel, if you look at luxury ladies’ handbags, all those kinds of things for the high income people who live in Japan is not deflation; it is actually inflation.”
 
In Julius Baer’s recently published “Wealth Report: Japan,” Tokyo ranks as the fourth most expensive of 11 Asian cities for luxury goods and services, in dollar terms. Shanghai, Singapore and Hong Kong were Nos. 1, 2 and 3. Japan’s capital was the most expensive in terms of wedding banquets, hotel suites, tooth implants and ladies’ shoes, but third in golf club memberships (behind Manila and Hong Kong) and ladies’ handbags (under Jakarta and Shanghai).

Yuan’s swift fall fans currency tensions

The yuan is becoming a destabilizing factor in the foreign exchange market amid renewed speculation that China’s authorities would tolerate a weaker currency to support the economy.

The Chinese currency has been depreciating at a faster pace since the end of the National Day holiday period in early October, spurring speculation that it could even hit 7 to the dollar. The trend could throw the market into turmoil by triggering a devaluation war with other Asian currencies. 

 The Chinese authorities sought to hold the yuan’s depreciation in check during a recent string of high-profile events, such as the Group of 20 summit in Hangzhou. The International Monetary Fund also added the yuan to the basket of currencies that make up its Special Drawing Right. 

But now that things are quieter, the yuan has weakened sharply, hitting 6.7 to the dollar.

As the market eyes a possible rate hike in the U.S., the dollar is looking firm. On the other hand, China’s economic slowdown remains a worry. Under the circumstances, there is a growing view that the authorities are inclined to let the yuan fall.

Citigroup predicts the yuan could fall to 7, or even further, against the dollar in 2018. The U.S. bank is not alone: A majority of currency market players expect the yuan to decline against the dollar in the medium to long run.

Sluggish exports

The yuan has tended to move in the same direction as the dollar. When the dollar appreciated through last year, the Chinese currency also strengthened. As a result, the yuan gained value against the euro as well as the yen and other Asian currencies, eating into China’s export competitiveness.

When the dollar began to weaken this year, the yuan followed and depreciated against the yen and other currencies. Keen to avoid a more serious slowdown in the Chinese economy, the U.S. tolerated these trends.

Recently, however, the yuan’s depreciation has accelerated while the dollar appears to have bottomed out. Chinese authorities, evidently, are OK with this.