Japanese Growth on the Upswing

Daily Analysis - 20/05/2015

Tailwinds of Looser Monetary Policies Being Felt Through the Japanese Economy

Preliminary figures released by Japan overnight showed that the Japanese economy expanded at a faster pace than previously anticipated, highlighting the marginal benefits of weaker inflation and improved competitiveness from the Yen.

Japanese GDP Surprises to the Upside

The Bank of Japan has telegraphed inflationary expectations to financial markets numerous times, citing the drop in energy prices as the factor preventing the Central Bank from achieving its ambitious inflation target. Nevertheless, the tailwinds from the weaker Yen are providing tailwinds for the economy as evidenced by the preliminary GDP figures released overnight. First quarter GDP printed at 0.60% versus forecasts of 0.40% expansion after recording 0.30% growth in the prior period. Annualized economic expansion came in at a surprising 2.40% versus estimates of 1.50%. This sharp move higher in economic activity highlights the benefits of monetary stimulus, with the Nikkei 225 complementing the data by rising to 1-month highs. USDJPY continues to benefit from the positive news, breaking above 121 after consolidating within a narrow range for several weeks.

US Housing Starts Soar

Mixed real estate data has generally dominated the news flow in recent months with weather related factors dragging on the measures of the US housing sector. Yesterday’s building permits and housing starts numbers showed surprising gains to the upside as the amount of new homes breaking ground accelerated over 20% month over month, rising to 1,135,000 from 944,000. The aberration behind the latest improvement in data came from the American Northeast which has seen single family home starts nearly double on a monthly basis. The last time gains this sharp to the upside were witnessed was back in 2008, just before the last financial crisis. Coupled with an optimistic reading from US building permits, which rose over 10%, the US dollar rebound continued to gain upside momentum against major peers.

Deflation Hits the UK

In a stunning turn of events, this yesterday’s CPI print from the United Kingdom fell into negative territory in the first such instance since 1960. Although European Central Bank leaders are cheering about the monetary union being free and clear from the deflationary threat, UK policymakers are under the impression that inflation should rise towards the end of the year, trending back towards the 2% longer-term target. The drop in consumer prices came mainly on the back of weaker energy and food prices, helping ease the cost of living expenses for citizens of the Kingdom. However, this will likely delay any potential shift in monetary policy until inflation rebounds, pushing back any potential interest rate hikes until 2016. After tumbling following yesterday’s US housing data, GBPUSD has leveled out modestly, retracing approximately half of the election gains.

AUDUSD Equidistant Channel Technical Pattern

With Australian policymakers warning of further rate cuts and the Government implementing an austerity budget, the AUDUSD currency pair looks set to resume the prevailing longer-term downtrend after a brief respite. Increasing pressure on the pair is improving US economic data which continues to bolster the dollar rebound. The downward trending equidistant channel formation setting up in AUDUSD for approximately a week has a predominantly bearish bias. The ideal strategy for taking advantage of the technical pattern is following the trend lower by originating short positions at the upper channel line to be closed at the lower channel line. Any move above the upper channel line could be indicative of a reversal and potential upside breakout to be accompanied by increased volume and momentum.