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Bank of Japan Risks Losing Control

Japanese Yen Plunge Tempered by Bond Market Intervention

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With the election of Donald Trump sparking a global bond selloff, Japanese bond yields have surged higher as investors sold the debt, sparking pronounced weakness in the Yen.  The USDJPY pair has retreated modestly following a promise to buy unlimited bonds to maintain the yield target, however, the move reeks of desperation and highlights the growing challenges facing the Central Bank.

Kuroda Sparks Yen Reversal


After losing nearly -10.00% over the last two months, the Yen is rising modestly after the Bank of Japan announced its commitment to buy an unlimited amount of bonds at fixed rates.  The move comes as bond yields globally have risen in response to expectations of greater fiscal stimulus from the United States combined with the prospect of higher interest rates.  As a result, Japanese bond yields have risen above the levels targeted by the Central Bank, requiring an intervention overnight as BoJ Haruhiko Kuroda promises not to bow to pressure from international markets.  His strategy of yield curve control is intended to keep short-term borrowing costs low while allowing longer-term borrowing costs to rise in an effort to help the economy meet its inflation target.  In the meantime, USDJPY is flat on the session after pulling back lower overnight.

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UK Unemployment Rate Dips Further


In another sign that the UK economy is still performing admirably in spite of the uncertainty surrounding “Brexit”, the unemployment rate has once again fallen, dipping to 4.80% for the three months ending in September.  Besides reaching an 11-year low, the labor force participation rate also climbed.  According to the figures, only 21.70% of people aged 16-64 were outside the labor force compared to 22.00% a year earlier.  Adding to the optimism was rising weekly average earnings, with earnings ex-bonus rising 2.40% versus the prior year.  Tailwinds from the weaker Pound continue to help boost economic activity as evidenced by the latest data which displays improvements almost across the board.  While inflation may have cooled moderately, the economy on the whole is showing signs of incorporating the post-referendum gains.  The Pound is mostly flat versus the Euro after notching minor gains during Wednesday’s session.

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US Industrial Contraction Continues


Although the probability of December action on interest rates remains extraordinarily high, currently trending above 90.00%, there are some concerns about the unevenness of the recovery in economic fundamentals.  Figures released on Wednesday showed that industrial production continues to contract across the United States, with the figure narrowing for 14-straight months.  Despite hopes for a pickup in the monthly headline data, industrial production was flat in October after falling -0.20% a month earlier.  While manufacturing production rose on a monthly basis, matching the prior month’s 0.20% growth, capacity utilization fell further, sliding to 75.30% during the most recent reading.  The disappointment coincides with weaker producer price growth as the Yuan devaluation continues to promote global deflation.  Falling producer prices could derail the Federal Reserve’s future normalization plans. While the Dollar index hit a multi-year high on Wednesday, gold prices remain elevated, trending just above $1228 per troy ounce.

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Oil Output Deal Looking Increasingly Distant


Following the latest US oil inventory data reported by the Energy Information Administration, news of OPEC members skipping talks in Doha was enough to dent the optimism driving prices higher.  According to the EIA, US onshore oil stockpiles rose by 5.274 million barrels last week, topping expectations by a wide margin and beating the prior week’s 2.432 million barrel build.  This coincided with inventory gains in nearly every category including distillates, gasoline, and other refined products. While US production fell marginally during the last week, it still remains close to 5-month highs.  The main event was news that Iran, Iraq, and Nigeria have decided that they will not participated in the Doha talks ahead of the OPEC meeting in Vienna at the end of the month.  WTI crude futures retreated from earlier session highs after the news, continuing the pullback lower during early Thursday trade.

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