Bank of Japan Stays the Course

Daily Analysis - 19/06/2015

Japanese Central Bank Maintains Record Stimulus

The Bank of Japan in its interest rate decision overnight moved to keep the benchmark rate unchanged as it awaits a rebound in inflation and greater economic tailwinds. According to Governor Kuroda, there are no imminent plans to adjust qualitative and quantitative easing further at this juncture.

Japanese Rates on Hold

The Bank of Japan made the move to maintain monetary policy overnight, citing an economy that is experiencing a “moderate” recovery with fundamentals gradually improving. Although not unanimous in the decision with one member of the Policy Board dissenting against the increased purchases of real estate investment trusts (REITs) and exchange-traded funds (EFTs), no policy changes are expected in the near future. BoJ Governor Haruhiko in comments this morning did reiterate that inflation is projected to return to the 2% target in the 1^st half of fiscal 2016 as the decision to preserve easing measures continues to help the economy meet those goals. In a boost to monetary policies, investment and capital expenditures are rising, increasing the efficacy of the Central Bank’s efforts. However, there are questions about the pace of exports which have slowed as Kuroda tries to jawbone the Yen higher.

US Consumer Prices Rise Less

As the Federal Reserve prepares markets for the advent of higher interest rates after largely shrugging off weaker data from the previous few months, the one item that remains unsupportive of any hike is inflation. Consumer price inflation figures released yesterday showed that the annualized consumer price index rose back to unchanged at 0.00% after printing in deflationary territory for three of the last four months. While the core number remains closer to the longer-term 2% targeted by the Federal Reserve, the year over year figure slipped from 1.80% to1.70%. Two successive rate hikes this year could kill the economy while inflation remains weak as it will see investment falter. In one boon for the Federal Reserve’s proposed policy is the trend in employment which has seen initial jobless claims fall back towards 42-year lows. The dollar continues to retreat as gold experiences one of its best runs in 2015.

ECB Calls Emergency Meeting with Greece

After raising the ceiling on the Emergency Lending Assistance program to Greek banks by EUR 1.1 billion earlier in the week the ECB is planning to hold a meeting with Greek officials today as the Central Bank might be preparing to end loan assistance to the nation’s embattled banking system. If this is the case and the ECB stops backstopping Greek banks, it could threaten to bring down the government as Greek protests revive. It was revealed yesterday that deposit outflows continue to pick up momentum after the banking system experienced EUR 2 billion in withdrawals in three days. With negotiations in tatters and the latest Eurogroup meeting an abject failure, the probability of an exit continues to rise as the Greek’s refuse to negotiate on the key sticking points. While it has been rumored that the ECB and Euro Area are preparing to take haircuts on Greek debt holdings, not such decision has been made public yet.

EURGBP Equidistant Channel Technical Pattern

The continued improvement in UK data in personal income and spending continues to bolster the moderate economic growth while meanwhile European neighbors contend with the unfolding Greek situation. With the Pound continuing to gain ground against peers and the Euros outlook shakier due to both external and internal factors, EURGBP looks set to continue its bearish trend. The equidistant channel pattern in the EURGBP pair has a bearish bias with ideal positions initiated at the upper channel line targeting the lower channel line. Should the Greek situation be resolved it could see a rapid appreciation in the Euro, however, without a major change in events, the current trend is unlikely to abate. Fighting the trend means worsening reward with heightened risks.