Japanese Growth Revised Higher

Daily Analysis - 08/06/2015

First Quarter GDP Numbers Reflect Growing Economic Prowess of Japan


The turnaround focus from the Government and Bank of Japan have seen GDP expand at one of the fastest paces in years as the Yen weakness aids exports with local companies recording stronger cash flows and showing more interest in investment to finance growth.

Japanese GDP Multiplies

The second estimate of Japanese first quarter GDP came in stronger than expected, revised higher from 0.60% in the first reading to 1.00% in the latest release. The number was helped along broadly by the rise in business spending which rose by 2.70% over the period. With companies recording higher profits and increasing cash flow, capital expenditure investment has ramped higher over time. Annualized GDP expanded at a 3.90% pace versus the 2.40% growth recorded during the initial estimates. Much of the gains are a reflection of the lift from a weakened Yen which has boosted export competitiveness. This marks the fastest growth in the region in years as policymakers explore ways to increase consumer spending to spur a greater restoration of the Japanese economy after climbing back from two decades of deflation. USDJPY has retreated from the highest levels seen since 2002 following the surge in the pair after Friday’s payroll data.


China Trade Surplus Inflates

The race to revitalize the Chinese economy through a combination of interest rate cuts, falling reserve ratio requirements, and a quantitative easing policy geared towards improving local government debt levels has fallen short of expectations. With inflation falling and manufacturing wavering on the cusp of expansion and contraction, policymakers as tasked with implementing more extreme measures to stoke growth in the economy as GDP expansion slows to the weakest pace in decades. Overnight figures confirmed the point after both exports and imports printed in negative territory. Despite the trade surplus climbing by 75% month over month, from CNY 59.49 billion to CNY 34.13 billion, imports slid by -17.60%. The epic decline in imports has more than offset the -2.50% drop in exports, however the pervasive weakness in both numbers shows the risks to the outlook. The USDCNY currency pair has meanwhile retreated modestly from Friday’s post payroll gains.


Turkish Lira Slides on Election

Emerging markets have been plagued with outflows of foreign capital over the last year as the surging US dollar and expectations of interest rate policy normalization led to a decline in local currencies across the developing world. One particularly hard hit nation was Turkey, which has seen the Lira trend lower against the dollar for years. Parliamentary elections over the weekend saw the Turkish Justice and Development Party lose its majority, with seats falling to 40% of total after winning only 260 seats versus a previous 327. While President Erdogan was untouched, his AKP Party will be forced to form a coalition with other parties which might prove challenging considering the current poisonous political environment, complicating efforts towards finding stability. The Lira fell to a record low against the dollar overnight with the USDTRY pair rising as high as 2.8090 before retracing part of the move and currently trading over 4.50% higher.


Brent Equidistant Channel Technical Pattern

The most widely used crude oil benchmark continues to trend lower in an equidistant channel pattern despite the brief gains from last Friday after the OPEC meeting. The cartel opted to leave output targets of 30 million barrels per day unchanged despite the fact that production remains higher due to blistering production from Saudi Arabia and growing output from Iraq. A scud missile aimed at a Saudi Arabian air base from Yemen also raised tensions in the Gulf after rebels agreed to meet with the Hadi Government under international auspices. The downward trending equidistant channel has a bearish bias with any gains in Brent prices likely to prove temporary. The key strategy for playing the pattern is taking positions from the upper channel line targeting the lower channel line. Fighting the trend lower with long positions sees reduced reward potential and expanded risks.


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