Yen moves higher as big week kicks off

Summary:

• Japanese yen is the strongest major currency this morning ahead of BoJ and Fed meetings
• Janet Yellen backs up a 25 bps rate cut this week stressing too low inflation
• US and Chinese officials to hold face-to-face talks starting from Tuesday

Yen leads the gains

It is going to be a turbulent week across financial markets as two big events will take place with the Federal Reserve widely anticipated rate cut being a cherry on top. However, before the Fed announces its decision there will be a verdict on monetary policy settings from the Bank of Japan. Even as expectations look quite muted as for this meeting - we have less then 15% odds for a rate cut - there is no doubt that the BoJ will find itself in a tough position. On the one hand, it has already approached (or is near to do so) its limits of monetary policy, on the other one a cut from the Fed (and possible subsequent rate reductions over the rest of the year) could exert upward pressure on the Japanese currency. Financial markets see it and this is probably why hedge funds have switched to modest long positions in the currency over the past six weeks after being short for almost a year. Thus, one may suppose that if the BoJ stands pat tomorrow just reiterating that rates will remain extremely low for an extended period of time, it could be not enough to discourage yen bulls. Moreover, the Japanse central bank will have to also take into account possible adverse effects from a sales tax hike scheduled for October despite preventive steps already undertaken by the government. All of these makes the BoJ meeting remarkably interesting. Finally, let us remind that market participants assign more than 60% odds for a rate cut by the year-end. Meanwhile, Japanese retail sales for July was unchanged in monthly terms while the consensus had called for a 0.3% MoM decline.

Hedge funds are now betting on the stronger Japanese yen. Source: Bloomberg

Yellen endorses rate cut

Former Federal Reserve Chairwoman Janet Yellen openly endorsed a rate cut in July on the back of global economic growth slowdown and low price growth. On the other hand, she does not see this rate reductions as a beginning of an easing cycle unless things get worse. She stressed that the US economy is doing well with the strong labour market, however, inflation is still too low justifying the case for a preventive rate decrease. Market expectations point to a 25 bps rate reduction seeing even 10% odds for a 50 bps cut - it appears to be a joke given what we got on Friday when the preliminary GDP data was released. Meanwhile, Chinese and US officials are expected to hold two-day talks in Beijing starting on Tuesday with neither showing a will to compromise though. It will be the first face-to-face meeting after the G20 summit in Osaka, Japan last month.

The Hang Seng has broken below the lower limit of the triangle pattern. The first important support could be found nearby 10580 points. Source: xStation5

In the other news:

• Chinese industry companies’ profits declined 3.1% YoY in June after rising 1.1% YoY in May

• Japanese PM Abe informed it was unlikely to meet with South Korean President Moon during the UN summit in September