Abenomics Faces Another Setback

Daily Analysis - 17/08/2015

Japanese Growth Turns to Contraction as Economic Activity Tumbles

The Bank of Japan’s extreme monetary policy measures have failed to spur the economic recovery that policymakers had bet on as the limits of Abenomics and currency devaluation are felt by one of the world’s largest economies.

Japan GDP Slips

The Japanese economy was dealt another blow overnight after gross domestic product figures showed output collapsing. Although the preliminary quarterly GDP number managed to beat estimates of a -0.50% contraction, printing at -0.40%, it is a far cry from the prior quarter’s 1.10% expansion. Moreover, the annualized figure shows the economy contracting at a -1.60% yearly pace, a vexing number for policymakers as they consider expanding easing measures and asset purchases to drive the Yen lower. In light of the move by China to devalue the Yuan, this could elicit comparable actions from the Bank of Japan. These latest results could be viewed as the beginning of the fifth recession to face the Japanese economy in just over 6 years, further highlighting the economic woes facing the beleaguered nation as policymakers seek to restructure the economy. The Yen has given up ground against the US dollar overnight, with USDJPY trending higher.

Merkel Talks Debt Relief

The deadline for Greece’s most pressing ECB repayment on Thursday looms large, the last hurdle for the proposed bailout package remains the German Bundestag which has shown increased opposition to any further measures to support the Greek economy. However, it in a turn of events, German Chancellor Angela Merkel did suggest in comments that debt relief might be possible for the Greeks. While she ruled out the possibility of debt reduction and write-offs, the idea of the extension of maturities for outstanding Greek debt was indicated as a possible solution. This would also potentially bring the IMF back to the negotiating table after the institution refused to participate in further bailouts without a mechanism for ensuring existing outstanding debt was on a more sustainable path. The Euro is trading weaker against peers since the European open as obstacles to a deal remain, with EURUSD off -0.34%.

Gold Appreciation Ebbs

The uptick in the dollar following the softness experienced last week is seeing gold prices well below last week’s highs despite the slight trend higher experienced overnight. With the dollar gaining on major currencies, there is pressure on gold prices to the downside especially in light of upcoming consumer price data from the United States and United Kingdom. Although US numbers are expected to show a slight increase, adding to the case for a September liftoff, the recent rout in oil prices might contribute to a number that misses expectations. Gold net long speculative positioning in futures contracts recorded a modest gain according to last week’s data from the Commodity Futures Trading Commission, adding to expectations that prices could run further, especially if FOMC Meeting Minutes due later in the week hints that interest rates will remain lower for longer.

WTI Crude Oil Equidistant Channel Technical Pattern

After last week’s rout, oil prices opened higher overnight in a modest relief rally. Although there is currently no news, the prevailing oversupply conditions evident in the market remain intact, meaning that supply outpaces demand by approximately 3 million barrels per day, a figure set to rise if Iran begins to increase output and exports. The equidistant channel pattern setup in West Texas Intermediate crude oil prices has a strongly bearish bias with ideal positions initiated at the upper channel line targeting the lower channel line. Fighting the near-term downtrend has the potential to see potential reward narrow and risks expanded. A move above the upper channel line could be indicative of a bullish channel-based breakout to be accompanied by additional momentum and volume to the upside.