BoJ downgrades assessment for CPI, euro stays depressed

Summary:

• Bank of Japan leaves its monetary policy settings unchanged as per expectations, an assessment for inflation downgraded
• Euro keeps trading far below 1.16 following a heavy drop post ECB
• WSJ reports Trump’s list of imported Chinese goods being embraced of tariffs to be similar to the preliminary one

The Bank of Japan was the last one among ’big three’ taking decision regarding monetary policy this week. Even as it was expected to be a non-event, it’s worth taking a closer look at some details outlined by BoJ members. Obviously all settings on monetary policy were untouched including a target for the 10-year JGB yield staying around 0%. The bank did also reiterate its pledge to buy JGBs more or less at the current pace so its holdings increase at the annual pace of around 80 trillion JPY.

However, the bank cut its assessment on consumer inflation citing that inflation expectations keep moving sideways. The board in general agreed that price growth is likely to quicken towards 2% when output gap closes, and inflation expectations increase - to be honest, it will be a hard nut to crack for them as it was the case in the past. In turn, the assessment on economic growth was unrevised as the BoJ said the domestic economy keeps expanding moderately. There was one member dissenting from today’s decision - Kataoka - saying he does not see high chances to bring inflation back to the goal in the foreseeable future. Therefore, his prescription was the BoJ should clarify it will continue easing further if domestic factors push back reaching the price target. Neither the Japanese yen nor the 10Y yield did respond more noticeably following the decision. The JPY is trading 0.2% lower, while the 10Y yield is moving close to 0.04% as of 6:47 am BST Friday.

The outlook for the yen remains unchanged in the aftermath of the BoJ’s meeting, and the pair is likely to hinge on an American factor. Technically we’re approaching an important resistance at around 111 from where some one may expect some sellers to occur. Source: xStation5

Beside the yen it needs to update the euro’s outlook as the shared currency tumbled on Thursday when the ECB had postponed a date for any rate hikes at least to the third quarter of 2019. The currency keeps trading below 1.16 in early trading Friday, the major support has yet to be tested though. Our view did not change post the ECB meeting yesterday, albeit a delay of the first rate hike is among the major risks to this view (we mean a 10bps rate increase of the deposit facility rate). Therefore, we keep seeing any downside moves as temporary with 1.1450 being a line in the sand. In our eyes the constantly flattening US yield curve along with the twin deficit might be enough to push the dollar lower in the medium to long term. In terms of tariffs we were offered some reports from the Wall Street Journal on late Friday suggesting that Trump’s levies on China will be similar to the preliminary list. Donald Trump approved duties on Friday for imported goods being worth up to $50 billion. China has already responded that retaliatory tariffs will be implemented, but there have been no details so far.

The euro is eyeing its crucial support area as the week is coming to an end. Notice the sell-off may gather pace in the morning, but then the shared currency might get relief at least to some extent. Source: xStation5