Bank of Japan Keeps Policy Steady

Daily Analysis - 20/12/2016

Central Bank Continues to Target Yields on 10-Year Debt


Meeting expectations, the Bank of Japan left monetary policy largely untouched, opting to keep the benchmark interest rate in negative territory while maintaining the 10-year yield targeting measures.  However, the statement from the bank was cautiously optimistic, with the institution upgrading the growth outlook citing a moderate recovery trend.

BoJ Forecasts Return to Moderate Expansion

Despite numerous headwinds facing the economy, Bank of Japan policymakers sounded a more upbeat tone during their latest decision as exports experience a pickup alongside improving medium-term inflation expectations.  Besides the trade perspective, the improvement also reflects better demand domestically as businesses and households increase their investment and spending.  Inflation is still a sticky subject, with the impact of weaker energy prices still keeping a lid on the figure even though the Central Bank is forecasting a gradual increase towards 2.00%.  Nevertheless, multiple risk factors were mentioned, namely the path of US monetary policy, the UK “leave” decision, problematic European debt, and other geopolitical risks.  After a moderate pullback following the weekly reopening, GBPJPY is back on the rise, halving the previous session’s losses.


Australian Officials Caution on Unemployment

Minutes from the latest Reserve Bank of Australia monetary policy meeting held earlier in the month showed the rising concerns of policymakers as record low interest rates create new risks for the economy.  One of the primary risks discussed during the meeting was increasing household debt levels as consumers took advantage of low rates to increase their borrowings.  The other major item that was viewed as troubling was job creation throughout the economy.  According to the Central Bank, most of the jobs created during 2016 were for part-time employment, not full-time positions.  Additionally, there is expected to be significant slack in the economy heading forward after the most recent quarterly contraction, while inflation is forecast to remain low before normalizing.  Since the release, the Australian dollar has trended modestly higher versus the New Zealand dollar.


German Producer Prices Escape Deflation

In another sign that the extremely accommodative monetary policy measures undertaken by the European Central Bank are having a positive impact, Germany producer price inflation rose for the first time since June of 2013.  Snapping a longstanding deflationary streak, the annualized producer price index printed at 0.10% for the 12-months ended in November.  While energy prices continued to drag on the figure, there was an improvement in intermediate and consumer goods.  Adding to the sense of optimism was upbeat data from business surveys.  The Ifo Business Climate Index for the month of December rose to 111.0, marking the best reading since 2014.  Helping corroborate the more hopeful business climate was the Current Assessment conducted by Ifo which also surpassed expectations.  Meanwhile, the DAX 30 equity benchmark continues to improve, reaching the highest point since August of 2015 earlier in the session.


Copper Hits One Month Low

After climbing spectacularly on the back of improving Chinese fundamentals and prospective fiscal stimulus measures proposed by President-elect Donald Trump, copper has since retreated significantly amid profit-taking.  Prices are continuing to trend lower after Monday saw copper fall to one month lows.  Even though there have been more upbeat assessments towards 2017 and the outlook for prices, rapidly rising stockpiles in London are creating a growing sense of concern amongst traders.  While speculators remain net-long at record levels on the hopes that fiscal stimulus in the US will come to fruition in the form of infrastructure spending, it could present a tipping point for more profit-taking, especially as Trump faces increased resistance from the Legislative branch.  Copper futures continue to trend below $2.500 as prices remain under pressure.


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