quarterly outlook report

Despite the fact that the European Central Bank has much more reasons to consider lowering interest rates compared to the Federal Reserve, the ECB not only raised the refinancing rate but Lagarde practically stated that there would be another rate hike in July. This decision not only contradicts expectations but also goes against common sense to some extent. Of course, this resulted in the dollar's decline, thereby reducing the pressure caused by its apparent overbought condition. However, the European economy is facing serious difficulties associated with the increased cost of energy resources.   The European industry suffers the most. Many, including in the West, are already openly calling what is happening the deindustrialization of Europe. And a strong dollar may somewhat alleviate this negative trend. So, the decisions and intentions of the ECB are more harmful than beneficial to the European economy. Especially considering that inflation in the euro area is slowing down as fast as in the United States. Today's inflation report should confirm the fact of its slowdown from 7.0% to 6.1%. And don't think that the ECB was unaware of this yesterday because we are talking about final data.   The preliminary assessment was already available two weeks ago. In such a situation, the most reasonable approach would have been not to touch interest rates and observe the developments for at least two or three months.   Frankly speaking, the ECB's actions are raising more and more questions. And this naturally leads to an increase in concerns, which are usually referred to as uncertainty risks. Investors typically try to stay away from such risks. Therefore, the euro's substantial growth, which pulled the pound along, is likely to be unsustainable and probably won't last long. The GBP/USD pair has surged in value by nearly 300 pips since the beginning of the trading week.     This movement has resulted in the extension of the medium-term uptrend. Take note that such an intense price change has triggered a technical signal of the pound's overbought conditions. On the four-hour chart, the RSI is at its highest level since autumn 2022, indicating a technical signal of overbought conditions.   On the same timeframe the Alligator's MAs are headed upwards, which points to an upward cycle. Outlook In this case, speculators are disregarding the overbought status, as evidenced by the sustained momentum and the absence of a proper correction. However, this process cannot persist indefinitely, and sooner or later, there will be a liquidation of long positions, leading to a pullback. Until then, traders will consider the psychological level of 1.3000 as the main resistance level.  

The 20-day moving average has capped further upside in the USD/JPY so far since last Friday, 21 July. BoJ will release its monetary policy decision and latest quarterly outlook report tomorrow, 28 July. The consensus is an upgrade for its FY2023 consumer inflation forecast to be above 2% while maintaining the upper limit of the YCC at 0.50%. Recent minor downtrend phase from 21 July 2023 high of 141.95 to today, current intraday low of 139.38 may see a retracement. Key resistance zone at 140.70/142.50. The recent rebound of 456 pips seen in the USD/JPY from the 14 July 2023 minor swing low of 137.24 retested the downward-sloping 20-day moving average last Friday, 21 July that is acting as resistance around 142.10/142.50. Thereafter, the price actions of USD/JPY retreated twice so far this week at/near the 20-day moving average, declined by 254 pips to print a 5-day intraday low of 139.38 as of today, 27 July Asian session at this time of the writing. The current short-term weakness of the USD/JPY has materialized ahead of the Bank of Japan (BoJ)’s monetary policy decision tomorrow where the consensus is an upgrade of its consumer inflation forecast to be above 2% (above BoJ’s target) for FY 2023 for its latest economic quarter outlook, and no change on the upper limit of the Yield Curve Control (YCC) programme on the yield of the 10-year Japanese Government Bond (JGB) to capped at 0.50%. Interestingly, this upper limit of the YCC is a wild card for tomorrow as several ex-BoJ officials have advocated an upward revision to the 0.50% limit as the current economic conditions warrant it such as elevated sticky inflation conditions in Japan where the national-wide core (excluding fresh food), and core-core (excluding fresh food & energy) stood at 3.3% y/y, and 4.2% y/y for June; at a 31-year and 41-year high respectively. Before BoJ releases its monetary policy decision and updated quarterly projections, BoJ officials will have a chance to access the leading Tokyo area’s consumer inflation data for July which is being released three hours earlier tomorrow as a key input to debate and assess the suitability of a change to the limits of the YCC programme.       Price actions have traced out a potential medium-term bearish reversal “Head & Shoulders”     Fig 1:  USD/JPY medium-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart) The price actions of USD/JPY have evolved into a potential bearish reversal “Head & Shoulders” configuration since the high of 29 May 2023. The appearance of this potential “Head & Shoulders” suggests that the medium-term uptrend phase from the 16 January 2023 low of 127.22 to the 21 July 2023 high of 141.95 may have reached its terminal condition where a potential medium-term downtrend phase may materialize next, and a break below the 136.90 neckline support of the “Head & Shoulders” increases the odds.      Minor short-term downtrend from 21 July high reached an oversold condition     Fig 2:  USD/JPY minor short-term trend as of 27 Jul 2023 (Source: TradingView, click to enlarge chart)  The recent minor downtrend phase from the 21 July 2023 high of 141.95 to today, 27 July’s current intraday low of 139.38 has reached an oversold condition as indicated by the hourly RSI oscillator. This observation suggests the risk of a minor bounce to retrace a portion of the minor downtrend with the key resistance zone coming in at 140.70/142.50. Watch the 142.50 key medium-term pivotal resistance to maintain the short-term bearish bias and a break below the 139.15 near-term support exposes the next support at 137.65/136.90 (also the neckline of the “Head & Shoulders” & 200-day moving average). On the other hand, a clearance above 142.50 invalidates the bearish bias to see the next resistance coming in at 143.60.

Asia Morning Bites Following rising speculation, will the BoJ tweak policy today? Chinese PMI data also due. Global Macro and Markets Global markets:  US stocks bounced off recent lows on Monday. Both the NASDAQ and S&P 500 gained more than a per cent ahead of this week’s expected no-change  FOMC meeting. Equity futures suggest that today’s open may take back some of these gains. Chinese stocks also had a reasonable day. The CSI 300 rose 0.6%, but the Hang Seng was more or less unchanged on the day. US Treasury yields also rose on Monday. 2Y UST yields rose 5.2bp to 5.054%, while 10Y yields rose 6bp to 4.894%. There was no macro data of note for the US on Monday driving these moves, and this close to the FOMC meeting, no Fed speakers either due to the blackout period. Despite the rise in yields, the USD had a softer day. EURUSD rose to 1.0613 in spite of weak GDP and inflation figures (see below) and also the failure of the EU and Australia to agree on a free trade deal due to disagreements over agriculture access. The AUD rose to 0.6366, Cable rallied to 1.2165, and the JPY dropped back briefly through 149 on speculation of further tweaks to BoJ policy at today’s meeting (see below), though it is currently 149.14. Other Asian FX also rallied against the USD on Monday. The THB and KRW led gains. The CNY dropped to 7.311. G-7 macro:  German GDP was slightly less awful in 3Q23 than expected, but still fell 0.1%QoQ (see here for more by Carsten Brzeski). The flip side of this is that this economic weakness is weighing on inflation, which fell to 3.8% YoY in October, down more than expected from the September rate of 4.5%. Eurozone GDP and inflation are released today, so with the German figures already out, there is some chance of an undershoot to the respective consensus expectations of 0.0% QoQ and 3.0%YoY for these figures. House price data and the Conference Board’s consumer confidence survey are today’s US data offerings. None of these releases look likely to alter the expectation for a pause at the Fed’s 2 November meeting. China:  Official PMI data is due at 0930 (HKT/SGT) today. Both manufacturing and non-manufacturing surveys are expected to confirm the slight firming in activity suggested by other recent activity data. Japan:  The BoJ has its policy meeting today. Speculation has been growing over the last couple of days that they may take steps to relieve pressure on Japanese government bonds (JGBs) and the JPY. Yesterday, local news media Nikkei, reported that the BoJ may allow the upper limit for 10Y JGBs to rise above 1% and also make some adjustments to their bond purchase operations. The latest quarterly outlook report will also be closely watched. We think that the BoJ will revise up its FY24 inflation forecast to above 2%, but leave untouched the FY25 forecast number. That way, they can maintain that sustainable inflation is not yet reached or that they are not yet confident about reaching the sustainable inflation target, which will buy them some more time to keep their negative interest rate policy until next year. Still, if FY24 inflation is above 2% then the market’s expectations for a policy change in early 2024 will rise. Japan's September monthly activity data was a bit soft.  September industrial production (IP) rebounded less than expected (0.2% MoM sa vs -0.7% in August, 2.5% market consensus) while retail sales unexpectedly dropped -0.1% (vs revised 0.2% in August). As September IP and retail sales were softer than expected, we think 3Q23 GDP is likely to record a small contraction. However, labour market conditions remained tight and showed some improvement. The jobless rate edged down to 2.6% in September (vs 2.7% in August, 2.6% market consensus) and labour participation rose to 63.3% from the previous month’s 63.1%. Also, the job-to-applications ratio was unchanged at 1.29. South Korea:  Monthly activity data was solid as suggested by 3Q23 GDP (0.6% QoQ sa). All industry industrial production (IP) rose for a second month (1.1% MoM sa) in September with manufacturing (1.9% MoM sa), services (0.4%), construction (2.5%), and public administration (2.3%).  Among manufacturing industries, semiconductors (12.9%) and machinery (5.1%) were big gainers, offsetting a big drop in motor production (-7.5%). Solid demand for high-end chips, which are higher value-added and have higher prices than legacy chips, is the main reason for the rise in chip production. Meanwhile, production cuts in legacy chips continued as inventory levels came down, and we believe that this differentiated trend will continue for the time being. We think October exports will finally bounce back after twelve months of year-on-year declines on the back of a recovery in semiconductors. Other activity data also made gains. Retail sales (0.2%) rebounded marginally after having fallen for the previous two months. Equipment investment gained (8.7%) with increases in transportation (12.6%) such as aircraft, and special machinery (7.3%) such as semiconductor manufacturing machines. Construction also rose 2.5% despite the contraction in residential building construction as civil engineering rose solidly (20.0%). September monthly activity data showed some recovery in the domestic economy but forward-looking data such as machinery orders (-20.4% YoY) and construction orders (-44.1%) all fell, suggesting a cloudy outlook for the current quarter and we expect 4Q23 GDP to decelerate.   What to look out for: BoJ meeting and China PMI reports South Korea industrial production (31 October) BoJ meeting, Japan retail sales, industrial production and labour data (31 October) China PMI manufacturing and non-manufacturing (31 October) Taiwan GDP (31 October) Philippines bank lending (31 October) US Conference board confidence (31 October) Australia Judo PMI manufacturing (1 November) South Korea trade (1 November) Regional PMI manufacturing (1 November) Indonesia CPI inflation (1 November) US ISM manufacturing, ADP report, JOLTS report (1 November) FOMC decision (2 November) South Korea CPI inflation (2 November) Australia trade balance (2 November) Malaysia BNM policy (2 November) US factory orders and initial jobless claims (2 November) Australia retail sales (3 November) China Caixin PMI services (3 November) Singapore retail sales (3 November) US NFP and ISM services (3 November)

Bank of Japan opens the door to ending negative rates, but timing uncertainty remains The Bank of Japan stood pat on monetary policy today as widely expected. But the market is now paying attention to a more positive tone on the wage and inflation outlook, as well as an upgrade to the FY2024 inflation outlook which lays the groundwork for policy normalisation. We still see a slightly higher chance of a first hike taking place in June than in April.   No surprise that the BoJ kept its policy rate and 10-year yield target unchanged We think the Bank of Japan's modest change in its view on inflation hints that policy normalisation is approaching. The BoJ assessed its statement that the likelihood of achieving the price goal has “continued to gradually rise.” Governor Kazuo Ueda’s comments on wages and inflation were also more positive than in previous meetings, signalling that a path to policy normalisation could be underway. Markets were likely pleased to hear that the central bank would consider whether negative rates should remain if the price goal is in sight and that it can make policy decisions without all small firm wage data.   Quarterly outlook report Aside from the policy decision itself, the BoJ’s quarterly outlook report was closely watched by market participants. As we expected, the BoJ lowered its core inflation outlook for FY 2024 from 2.8% to 2.4% while upgrading the outlook for FY 2025 from 1.7% to 1.8%. The government's efforts to curb inflation and the recent weaker-than-expected global commodity prices will likely drag down the price for early 2024, but the BoJ still sees underlying inflation pressures remaining through FY 2025, induced by solid wage growth. This tells us that a rate hike is only a matter of time – but with the BoJ reconfirming its patient easing stance, the timing remains uncertain.     BoJ outlook Market bets on an April rate hike increased sharply after today’s decision, but for now, we retain our long-standing view of the first rate hike materialising in June. Of course, this could change depending on upcoming inflation trends and growth conditions. There was no change in the forward guidance from today’s statement, and we don’t think the BoJ will deliver any policy changes at its next meeting in March. We also don't expect it to make any noise by delivering a surprise policy change at the end of the fiscal year. Governor Ueda has stated that more information will be available ahead of the April meeting than in March, so we're inclined to think that the latter is probably off the table. There are several areas to follow to gauge the precise timing of the BoJ’s policy change, but inflation should be considered the most important of them all. In our view, the inflation path up until April will be quite bumpy, exacerbated by the government’s energy subsidy programmes. Consumer inflation has slowed over the past two months as the government renewed some of the subsidy programmes from last November, combined with softening oil prices. We expect inflation to move even lower in January (vs 2.2% in December) but pick up quite sharply again in February. April CPI is a key piece of data for judging the inflation trend, but by the time the April meeting is held, the nationwide CPI report won't yet be available. April is also in the middle of the wage-negotiating Shunto season. While Governor Ueda mentioned that there isn't any need to wait to gather all data from small firms, we belive that the BoJ will wait a couple of more months to see if the wage growth could actually lead to sustain inflationary pressure – particularly in service prices. The BoJ will take orderly steps, including forward guidance being revised before any action is taken. We think that this revision will likely happen in April. Taking these factors into consideration, we still expect the Bank of Japan to announce its first rate hike in June for now.     Choppy inflation is expected at least for 1Q24   FX: Not hawkish enough USD/JPY held pretty steady after the release of the BoJ decision but dropped around 0.7% as Governor Ueda hinted that wages and prices were heading in the direction of price stability. The same thing occurred in the JGB market, with 10-year JGB yields edging about 3-4bps higher around the same time as USD/JPY sold off. As above, market expectations of a shift in BoJ policy will now roll on to the 26 April meeting, when the next set of CPI forecasts will be released. Today’s price action, where the yen is now handing back its short-term gains, suggests the market will be happy to park the BoJ policy normalisation story until April. Given further upside risks to US rates over the next month – including the risk of higher Treasury yields next week, should the US quarterly refunding announcement shine a light on the US fiscal deficit – USD/JPY can probably continue to trade around this 147/148 area. And BoJ intervention remains a threat should USD/JPY trade over 150 again. We currently have USD/JPY forecasts at 140 for the end of March and 135 for the end of June. We certainly like that direction of travel – particularly if the short-end of the US curve starts to break lower ahead of the first Fed hike, which we forecast in May. The risk is that mixed market sentiment and low volatility keep interest in the carry trade and keep the yen softer than our end-of-first quarter target. However, we suspect carry trade investors will be increasingly turning to the Swiss franc as their preferred funding currency. The Swiss National Bank wants a weaker currency and may be the first to ease. The BoJ wants a stronger currency and will now be the only G10 central bank to hike.