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Risk-off puts Yen under the spotlight; Worrying levels on the cards for the BoJ meeting today?

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  • Forex today was quite lively with a risk-off tone that initially had the dollar under demand in Asia until the Europeans started to offload greenbacks.
  • Global growth is a concern and the negative expectations that kicked in at the end of last year have returned to haunt global equities once again, setting off the yen’s upside, sending US yields much lower and putting a bid into gold and safer havens as US stocks tanked which ultimately weighed on the high betas such as the Aussie. 

However, markets seemed to have all but forgotten that China is boosting its stimulus package. “Policymakers in Beijing are expected to continue ramping up stimulus to shore up the slowing Chinese economy in the wake of growth slipping to the lowest annual rate in almost three decades, with analysts expecting a raft of measures similar to those deployed last year,” the FT wrote yesterday. 

However, the crux of the situation is the Sino/US trade dispute. There is mixed sentiment surrounding this saga and today’s markets were concerned on the reports that Trump turned down trade talks with Beijing for preparatory talks ahead of a critical round of trade talks next week, US officials citing a lack of progress on forced technology transfers and structural reforms to China’s economy. The headlines were subsequently refuted by Kudlow, although markets ignored the conflicting headlines and stayed with the offer. 

The Dow shed 301.87 points, 1.22% to 24,404.48, with the S&P 500 losing 1.42%, 37.81% closing at 2,632.90. The Nasdaq was the biggest loser falling 1.91%, 136.87 points to 7,020.36. Weakness in oil also prices also weighed on sentiment. WTI fell 2.9% to USD52.3/bbl and gold rose 0.2% to USD1283.5/oz on safe-haven demand.

However, we will now have to see whether next week scheduled meeting between China’s vice premier Liu He and Treasury Secretary Mnuchin and Robert Lighthizer, Trump’s top trade negotiator, will take place and what outcome there might be. However, whether there is progress or not, markets will likely remain cautious considering the US is bound to demand strict compliance over whatever demands and rules China is obliged to fulfil and it is whether China will play ball under such terms that markets will monitor closely. 

“It is difficult to see what will shake the markets out of their risk-off tone in the near term as lead indicators of growth continue to wane,”

analysts at ANZ Bank argued.

Currency action:

Analysts at Westpac noted all the action in the majors:

“AUD/USD fell to a two week low around 0.7120, about -0.5% on the day (weakest in the G10) as global markets traded on the back foot. NZD mildly outperformed, holding to a 0.6705-0.6735 range, leaving AUD/NZD -0.4% on the day at 1.0595. USD/JPY followed US treasury yields lower, -0.4% to 109.25.

EUR/USD was heavy early, falling 30pts to 1.1335 amid a weak ZEW survey but recovered back to 1.1370 as risk aversion emerged. Despite growing focus and planning on the possibility of a no-deal Brexit, GBP outperformed, rising 0.6% to 1.2960.”

Key notes from U.S. session and early Asia:

Key events ahead:

The main focus will be on The Bank of Japan policy first meeting of the year that concludes today. There is no fixed time for the statement release. The last updated quarterly forecasts and the economic report concluded just after 2pm Syd/11am Sing/HK. The Fed, trade wars, tax hikes, falling prices, underlying low inflation and exchange rate movements will all be key. 

Analysts at Westpac Banking Corporation argued that despite likely downgrades to forecasts of both inflation and growth, there have been no hints of any change to the basic policy settings of targeting the 10 year JGB yield around 0%, JPY80trn annual JGB purchases (no matter the reality of much slower purchases), -0.1% on the short term policy rate and an intention to maintain “current extremely low” interest rates “for an extended period of time.” We should see the usual dissents from Kataoka and Harada.”

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