Bank of Japan Highlights Downside Risks

Daily Analysis - 01/11/2016

Japanese Central Bank Leaves Policy On-Hold


The Bank of Japan members responsible for determining monetary policy determined that the best path strategy ahead of the US Federal Reserve decision was to leave interest rates on hold in negative territory.  Despite some dissent in the interest rate vote, members agree that inflation reaching the 2.00% will take longer than previously anticipated.

Japanese Inflation Expectations Trickle Lower

In its latest decision, members of the Bank of Japan voted 7 to 2 to maintain interest rates at -0.10%.  With inflation and consumption remaining in contractionary territory, the Central Bank opted to implement no new policy measures.  At the same time, a growing component of their policy includes stabilizing the bond market to meet certain targets as the impact of negative interest rates spreads.  Inflation has been the predominant problem facing the Central Bank, with data last week showing the economy remains firmly in an environment of falling prices.  Reflecting this reality was the decision to revise 2017 inflation forecasts downwards from 1.70% to 1.50%.  Hitting the government’s 2.00% target will be pushed back to 2018 as a result.  In the meantime, the Yen has weakened modestly versus peers, with EURJPY climbing as high as 115.468.


Chinese Manufacturing Activity Climbs to a 2-Year High

Thanks to ongoing fiscal and monetary stimulus, factory activity in mainland China is back on the mend according to the latest data.  Figures reported by Caixin showed that the manufacturing purchasing managers’ index climbed to 51.2 during the month of October, marking the highest reading since July of 2014.  The rebound in the figure was mirrored by the official data reported by the China Logistics Information Center.  The official PMI also rose to 51.2, showing the manufacturing expansion is accelerating to the upside amid a more competitive Yuan and growing private sector debt.  Part of the gains are attributable to the booming housing construction sector.  However, as the employment index showed, manufacturers are still slashing their workforces as Beijing works to cut overcapacity in heavy industries. Meanwhile, the USDCNH pair is back on the rise, trending back towards Friday’s record high.


Australia Central Bank Leaves Rates on Hold

Amid better than anticipated growth in China and a rebound in manufacturing activity, key trading partner Australia opted to leave the key interest rate on hold at 1.50%.  Helped by rising commodities and expansive fiscal stimulus in China, Australia is growing at a moderate pace according to Reserve Bank of Australia Governor Philip Lowe.  However, he was quick to caution that an appreciating currency may harm some of those gains, especially as the economy struggles to contend with a challenging trade environment.  Furthermore, inflation is expected to stay low, only experiencing a gradual improvement over the next two years.  However, despite tightening lending standards, there are many concerns about the pace of price gains in housing.  In response to the decision, the Australian dollar rose versus peers, with AUDUSD rising over 70 pips off of intraday lows.


Greater OPEC Consensus Sees Oil Prices Rebound Moderately

Growing concerns about the ongoing divide within the Organization of Petroleum Exporting Countries (OPEC) were quelled on Monday after the group approved a strategy to help manage the energy market.  The decision paves the way for OPEC to take a more proactive approach towards balancing the market and reacting to developments in an effort to stay a step ahead of developments in the industry.  However, the deal remains tentative as evidenced by growing output during the month of October and concerns that Iran will not even agree to freeze production at current levels to help support prices.  Deal terms with non-OPEC producers have still not be determined, hurting the outlook for a deal.  While a gas pipeline explosion in the United States might provide some temporary support for prices, Brent crude futures are likely to keep giving back gains ahead of the November OPEC meeting in Vienna.


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