Stocks surge, yen falls as risk sentiment rises

Summary:

• Japanese headline inflation beats expectations but core measures remain well below the BoJ’s target

• Former BoJ’s board member doubts the objective is attainable, BoJ cuts buying of debt with maturity exceeding 25Y

• Stocks surge across the board, USD poised to book large declines this week

Japanese inflation increased in August more than expected but at the same time two core gauges stayed muted signalling the Bank of Japan is unlikely to change its policy explicitly for the time being. Headline price growth totalled 1.3% in annual terms beating the median estimate of 1.1% and marking an encouraging pick-up compared to 0.9% seen in July. JPY bulls were not offered many hawkish points though as both core and ‘super-core’ inflation improved just modestly. The former, excluding fresh food, rose 0.9% from 0.8% in the previous period whereas the latter which takes out fresh food and energy jumped 0.4% from 0.3% in July - both readings matched expectations. The yen did not respond to these prints at all, and it basically declined over the Asian session on a broad-based risk-on mode supporting equity markets. Note that we got also the news from the Japan’s central bank that it decided to cut buying of debt with maturity over 25 year by 10 billion JPY at its regular operation on Friday. It was the first reduction since July when it comes to this segment. Let us also cite the former BoJ board member Shirai who said that “before taking any clear steps toward monetary policy normalization, the BoJ should introduce flexibility in interpreting the 2% price stability target”. She put forward that the BoJ could incorporate the 1% upper and lower range for the price objective as she sees the low likelihood of striking the 2% goal. Looking at the currency market in the morning one may notice moderate moves with the US dollar treading water. The Japanese yen is trading 0.25% lower as of 6:52 am BST.

The Chinese Hang Seng seems to set for breaking out its 75DMA, a critical move which would enable the index to move at least toward 11200 points. Source: xStation5

However, the entire week has not been successful for the greenback to say the least as it is expected to book its second back-to-back sizeable decline this week just ahead of the Federal Reserve meeting next week. The chart below shows this carnage signalling at the same time that we could be just in a halfway of the ongoing pullback. It is also worth mentioning the EURUSD which broke through its crucial resistance on Thursday. In Friday’s morning it is trading nearby 1.1780 - preliminary PMIs for September could undoubtedly affect the pair. Why has the greenback fallen? Note that this has happened despite the simmering risks regarding the trade war between the US and China as market participants apprenty have already accustomed to it. As a consequence, risk sentiment has improved pulling the US yield up (the 10Y yield is moving around 3.08% at the time of writing which is roughly 10 basis points higher compared to the beginning of the week), high-beta currencies have rebounded and stocks around the globe have recovered. Taking into account that risks surrounding the Fed meeting seem to be tilted to the downside for the dollar, one may suppose that EM currencies could do well in the weeks to come possibly until the elections in the US in November as Donald Trump could be more lenient in trade negotiations until then.

The US dollar index is set for another heavy weekly decline as traders gear up for the Federal Reserve meeting next week. Technically the price could move toward 92.5 followed by 91.50 which looks doable given current impetus of the downtrend. Source: xStation5

In the other news:

• Hang Seng (CHNComp) gains 1.75%, Shanghai Composite rises 1.6%, NIKKEI (JAP225) moves 1.1% higher following the decent gains on Wall Street where NASDAQ (US100) and Dow Jones (US30) added 1% each whereas SP500 (US500) gained 0.8%

• Japanese PM Shinzo Abe and US President Donald Trump will hold a summit meeting on 26 September in New York

• S&P raises the rating outlook for Australia citing the expectation of the budget returning to surplus early in the next decade