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Japanese Inflation Recoils

Weaker Inflation and Contracting Retail Sales Raise Further Obstacles for the Bank of Japan

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The Bank of Japan has its hands full as hurdles to the outlook mount.  The Central Bank is already contending with problematic developments in the bond market as liquidity disappears and now must manage the prospect of inflation weakening further in-line with global developments.

Trouble Afoot in Japan

Besides problems in the world’s largest sovereign bond market owing to the Bank of Japan’s extensive monetary easing program, inflation continues to prove problematic with Japan struggling to avert disinflation.  Core CPI released overnight declined from 2.20% to 2.00%, missing expectations and highlighting the headwinds facing the Central bank as they seek to maintain inflation.  Not helping the situation is weaker energy prices which could fall further if the nation moves forward with bringing two nuclear power plants back online.  This would dramatically reduce imported energy needs at a time when the energy markets are largely oversupplied.  The one bright spot was the month over month growth in household spending, and although negative on an annualized basis, the trend looks to be reversing.  USDJPY trended higher overnight in spite of the disappointments aided in part by dollar strength.

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Egypt and Saudi Arabia up the Ante

Although oil has retreated from its conflict breakout surge, prices remain elevated as the risk of dragging in other regional powers to the budding conflict in Yemen threatens a larger scale war in the Gulf.  Saudi Arabia and Egypt are currently in the process of preparing for a ground offensive with the deployment of approximately 150,000 Saudi troops.  Yesterday saw Egypt and Saudi Arabia manage to secure the ports in Aden and Midi while executing a naval blockade at Bab El-Mandab, thwarting Iranian efforts to control these geopolitically strategic access points.  These actions drew stern condemnation from Iran which has supported Houthi rebels through the conflict.  If Iran formally enters the conflict instead of acting through proxies, this has the possibility of sending oil prices sky high as seaborne oil flow could be readily disrupted. 

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Strong Jobless Claims See Dollar Reverse Higher

After steadily declining following the Yellen press conference, the dollar has reversed higher on stronger jobless claims despite a slew of other negative data.  Initial claims printed at 282,000 versus expectations of 290,000 with the four week average falling to 297,000, below 300,000 for the first time since February 26th.  Traders are anxiously awaiting today’s important GDP release as investors wait for glimmers of hope for the economy after months of disappointing fundamental data.  Expectations are for a final fourth quarter GDP print today that will exceed prior estimates, with forecasts for 2.40% expansion quarter over quarter compared with the previous 2.20% estimation.  Demand for the dollar has seen commodities retreat modestly with gold retesting the $1200 handle and WTI crude oil trending back towards $50 per barrel.

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USDCAD Horizontal Range Technical Pattern

The most recent weakness in the dollar has seen the USDCAD pair test the bottom of a multi-month range, intact since January.  However, yesterday’s sharp reversal in the dollar that occurred after the release of the employment data has sent the pair higher after nearly touching support at 1.2380.  With the Federal Reserve and Bank of Canada unlikely to implement any major policy changes in the near-term, the near-term weakness in the pair might be reversing to the upside as USDCAD remains bound by the 400 pip range.  The driver ahead in today’s session will be US GDP which could send the pair higher if the figure matches or exceeds expectations.  Any miss could send the dollar tumbling and see the pair experience a breakout from the range.  In the meantime, the prevailing strategy is to trade the range until a fundamental shift causes a breakout.

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