Thursday, October 17, 2019

US retail sales fall short of expectations; will the Bank of Japan ease its monetary policy this month?

  • Dollar
  • Gold
  • Yen
  • Pound
  • Stocks

Market recap: renewed fears of an economic slowdown cause US equities to tumble
US equities fell yesterday after the release of disappointing domestic retail sales figures, which were down 0.3% from last month. The DJIA remained mostly flat, slightly decreasing by 0.08%, while the S&P 500 and the Nasdaq retreated 0.20% and 0.30% respectively. The Dollar Index continued its losing streak, falling 0.29% as sentiment surged regarding a possible Fed rate cut at the end of the month.

A Brexit deal is now looking more likely, but it is not clear yet whether the Northern Ireland Democratic Unionist Party, which formed a coalition with the British government after the last general election, will approve it. The EU summit begins today and there is still uncertainly surrounding British Prime Minister Boris Johnson’s revised Brexit plan - will he be able to get EU leaders to agree to it before the October 31st deadline? Sterling rose 0.35% yesterday, while the FTSE100 lost 0.61%.

Safe haven assets jumped amid fears of an economic slowdown in the US. Gold surged 0.62% and the yen strengthened against the dollar by 0.09%. US Treasury yields fell across the board, with two-year yields losing 3bps to end at 1.58% on Wednesday.

Asian markets opened mixed on Thursday morning. The Nikkei started the day 0.10% lower but recovered later in the day. The Hang Seng Index and Straits Times Index rose 0.54% and 0.11% on market open.

Today’s analysis: Typhoon Hagibis and increased consumption tax take their toll on Japan’s economy
The Bank of Japan (BoJ) will announce its next monetary policy decision on October 31st at 6am (GMT +4). At its last meeting, the central bank kept rates unchanged at -0.1% but during BoJ Governor Haruhiko Kuroda’s speech in September, he indicated that while Japan’s inflation rate is expanding towards 2.0%, it will likely fade due to increasing global risk (caused by the US-China trade dispute and Brexit, plus continued signs of a global economic slowdown).

The devastating impact of Typhoon Hagibis, which hit Japan earlier this month (and prompted the Japanese government to announce plans to allocate US6.5bn from reserves to deal with the aftermath), plus an increase in consumption tax in Japan from 8% to 10% on October 1st, is likely to cause the economy to contract in the next quarter.

Japan’s national inflation rate figures for September will be announced on Friday, October 18th at 3.30am (GMT +4) and will likely meet expectations and not deviate greatly from the previous month. The yen will most likely see little change once the data is released.

At the end of October, we expect the BoJ to introduce additional quantitative easing, to curb a likely slowdown in Japan’s domestic economy while managing the increasing geopolitical risks that are putting upward pressure on the yen. But the currency will probably be more influenced by changes in geopolitical risk than an increase in quantitative easing.

*Source: ADSS, Bloomberg

We expect demand for safe haven assets to increase in the future due to the markets being overly optimistic about a US-China trade pact and a Brexit deal before the October 31st deadline. USD/JPY may fall in the medium term, toward 107.94’s level as a result.

*Source: ADSS, Tradingview

The bulls are currently in possession of the USD/JPY, trading above the 50-day and 100-day moving averages. We expect the bears to put more downward pressure if geopolitical risk rises, forcing the pairing to break 108.33 support levels and continue towards 107.94’s level. In the medium term, the yen should continue to strengthen unless we see concrete developments regarding a US-China trade deal or a formal Brexit announcement that has been rubber-stamped by EU leaders and the UK’s House of Commons.