Japan, the Yen and the Aussie

Three days ago, we saw that Japanese GDP contraction in the second quarter was revised to an annualized 7.1% QoQ (vs. 6.8% previously), shrinking at its fastest pace in more than five years, due to a deeper decline in consumer spending and a bigger fall in capital expenditure (money used to purchase, upgrade, improve or extend the life of LT assets). In addition, the Ministry of Finance reported that the country showed market a current account surplus of 416.7bn Yen in July (slightly less that 444bn expected and 30% down compare to July last year) as the income from foreign investments (up 2.8% to 1.853tr Yen) outweighed the trade deficit (964bn deficit Yen in July, August one to be released on Sep 17th).

While the unemployment has fallen quite sharply since Abe’s election (4.5% in Dec 2012) to 3.8% in August, real wages have constantly been declining over the past few years (they fell by 3.8% YoY in May, the sharpest decline in years). One explanation of the fall in real wages we read lately (The Economist, Feeling the pinch) was that Japan’s labour market is divided between two sorts of employees, regular ones who are usually highly paid and protected [against being fired] and the non-regular [low-paid] ones. If you have a look at the figures, non-regular workers accounted for 36.8% of all jobs in June, a high number compare to historical standards and therefore confirming that most jobs created since Abe took office were non-regular workers.

This definitely explains weakening figures in household spending. We saw that July Household Spending fell 5.9% YoY, twice what economists expected, printing in the negative territory for the fourth time in a row. As a reminder, Japan is a consumer-driven economy (61% as a percentage of GDP in 2012 according to the World Bank); therefore the BoJ will watch closely those figures in order to avoid another dismal quarter.

However, according to the Bank of Japan Deputy Governor Kikuo Iwata, the economy is ‘gradually recovering’ and it is all about the sales tax increase effect. Moreover, with the BoJ now monetizing debt at negative rates (T-Bill 12/08/2014 has been trading in the negative territory for the past few days as you can see it in the chart below), Iwata added that he didn’t see ‘any difficulties in money market operations’.

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(Source: Bloomberg)

Quick review on USD/JPY

The recent surge in the stock market (Nikkei up 1,000 pts over the past month, closing at 15,788.78 earlier this morning) mainly coming from ‘more QE coming soon’ speculation combined with demand for international securities (Bonds, Stock) from Japanese funds have both played in favour of the depreciation of the Yen lately since it broke out of its 101 – 103 range on August 20. In addition, with US yields starting to ‘surge’ (10-year yield up 20bps over the past two weeks and now trading at 2.53%), USDJPY was sent up to 106.85 during today’s trading session, breaking its resistance of 105.44 (Jan 2nd high) and trading to levels seen back in September 2008. If the depreciation continues, the next MT target on the pair stands at 110.

Aussie updates…

AUDJPY (black bar) eased a bit from last week’s [16-month] high of 98.65, down more than a 100 pips (carry trade unwinds combined with AUD selling from corporate and macro names), taking the equity market (red line) with ‘him’ (S&P closed below the 2,000 level at 1,988).

AUDJPY-10-Sep(1)

(Source: Reuters)

The AU benchmark (S&P/ASX) index came back to a 3-1/2 week low after Westpac’s index of consumer sentiment reported a 4.6% decline in September, bringing the Aussie below the 0.9200 support against the greenback.

AUDUSD is also trading below its 200-day MA (0.9180) for the first time in five months. Market has turned bearish on the pair as the failure to hold the 0.9180 – 0.9200 support area has opened up further retracements levels: 0.9075 (61.8% Fibo retracement of 0.8658 – 0.9756), followed by 0.9030. Australia will report employment figures overnight (2.30 am), which traders expect to be disappointing, therefore sending the Aussie to lower levels.

AUD-10-Sep(1)

(Source: Reuters)

Risk-ON and US Dollar strength persist…

While tensions in Syria are still elevated with a second American ISIS fighter killed in a battle, Gazprom beginning accepting payment in Rubles and Chinese Yuan (via the ESPO – Eastern Siberia Pacific Ocean – pipeline), Ebola outbreak causing enormous damage to West African economies (economic growth expected to plunge by 4% in the region according to the African Development Bank), Argentina’s black market peso completely out of control tumbling to over 14 / USD (14.45 according to Argentine newspaper Ambito), French jobseekers surging to record high of 3.424 million (with PM Manuel Valls blaming the ECB to do more as QE was the solution to everything) and IMF head Christine Lagarde put under a formal probe for negligence in a corruption investigation… AUDJPY continues to climb and is now trading above the 97.00 level for the first time since June 2013 and the S&P500 closed above the 2,000 for the second time in history.

AUDJPY(1)

(Source: Reuters)

While European bourses have been also climbing during the same period with DAX and CAC40 both up approximately 6.5% for instance, yields on all German bonds out to 3 years are now negative (see current German yield curve in green) with the 10-year Bund 90.1bps and French 10-year OAT yield trading at all-time-low at 1.25%. The orange curve represents the German yield curve 1 month ago, and the histogram tells us the change over the past month).

image001(1)

(Source: Bloomberg)

Euro: the single currency still remains under pressure and is now trading below the 1.3200 level against the greenback, down 8 figures since May meeting (Draghi’s ‘ready to act next meeting’). It seems that the market is expecting more easing measures at the ECB meeting next week (September 4). As growth is weakening, the ECB will be much more intolerant of low inflation (flash August Inflation is expected to fall to 0.3% YoY from 0.4% the previous month) and high unemployment rate (currently stands at 11.5%). As a reminder, ECB staffs reduced its annual inflation forecasts in Q3 from 0.9% to 0.7% for the year 2014 and from 1.3% to 1.2% for 2015. With the 5Y5Y Euro inflation swap – ECB’s preferred measure of MT inflation – falling below the 2% level, investors are predicting another cut in the last quarter of this year therefore raising expectations of further measures from the ECB Governing Council. In addition, we saw this morning that loans to private sector fell by 1.6% in July (vs. -1.5% consensus) while M3 money supply grew by 1.8% from a revised 1.6% in June.

After Draghi delivered a dovish speech at the Jackson Hole central bankers’ meeting concerning the falling expectations of future EZ inflation, we heard yesterday that the ECB appointed money manager BlackRock to advise a program to buy ABS in order to revive the faltering Euro-area economy (announced at the June meeting). We would put public QE (sovereign bonds) option on aside for the moment, however we would opt for further updates concerning the ABS program and a potential rate cut. Otherwise, the next important date for the EZ will be on September 18, the first tranche of the so-called TLTROs.

The next support on EURUSD stands at 1.3150 (yesterday’s low), followed by 1.3100 (September 2013 low). Another interesting development to watch is EURCHF, which is now trading below the 1.2060 key support. The next support stands slightly above 1.2020 before the floor of 1.2000 (which remains our target in the coming weeks).

GBP: Sterling, the once used-to-be market’s darling, has fallen more than 6 figures since its mid-July high of 1.7191 and is now trading slightly below 1.6600. It broke its 200-day SMA on August 19 for the first time in more than a year, bringing in more participants in Cable’s bearish trend as the market likes trending market. If we have a look at the CFTC’s Commitments of Traders (see below), we can see that the net speculative positions fell from above 56K on July 1st to 13K+ reported on August 19th. We expect a pause at current levels in the coming days between 1.6550 and 1.6600.

COT-GBP(1)

(Source: OANDA)

UK strong GDP 2nd estimates (0.8% QoQ, 3.2% YoY) two weeks ago didn’t manage to bring investors’ interest on the British pound as annual inflation came in much cooler than expected in July at 1.6% YoY (vs. 1.8% eyed) shattering expectations of an early rate hike from the BoE. The implied rate of the Short-Sterling March 2015 futures contract is trading at 89bps, down from 1.15% in the beginning of July.

JPY: We will finish this article with a quick update on Japan and the Yen. Despite US yields running low, below the 2.40% level (trading at 2.33% at the moment), USDJPY broke its strong resistance at 103 to trade at 104.43 (Monday’s high) before edging back below the 104.00 level. We heard lately from Japanese Vice Economist Minister Nishimura that the Japanese economy may need more time than expected to swallow the sales tax hike (April 1st) and that the government may have to be more vigilant for the second planned one (October 2015). As a reminder, Japan GDP shrank by 6.8% (annual pace) in the second quarter and erased Q1 gains. The market is bearish on the JPY against most of the currencies and traders are quite confident that the government and especially the BoJ will do ‘whatever it takes’ to sustain Abe’s ambitious goal.

If we have a look at the recent figures, we saw that industrial production slid 3.4% MoM in June (biggest decline since the March 2011 disaster). JP trade balance deficit widened to 964bn Yen for July (vs expectations of a 702.50bn gap Yen) and the country reported a second current account deficit in June (399.1bn Yen) and the first January-June deficit in 29 years.

Important July figures to watch overnight: Core Nationwide CPI, expected to remain steady at 3.3%, Unemployment rate (also to remain steady at 3.7% according to consensus) and Preliminary Industrial Production (expected to tick up to 1.0% MoM after June’s decline).

Based on our last couple of discussions we had with some traders, it seems that the market is looking for buying opportunities on USDJPY. Pivot point is seen at 103.50/55, where there is talk of lots of buy orders.

No deal for Argentina: default imminent

Argentina eventually entered into a state of default for the second time in 12 years as the holdouts and the Argentine government failed to reach an agreement. Credit rating agency S&P cut the county’s rating from CCC- to Selective Default.

Economy Minister Axel Kicilloff offered holdouts to restructure their debt within the same conditions agreed in the 2005 and 2010 swaps, but they refused and the $539 million interest payments haven’t due to holders of Argentine restructured debt won’t be made. Even if it deposited the full amount in the Buenos Aires account of trustee agent Bank of New York Mellon, the bank couldn’t pass it on as Argentina had to agree to settle with them.

MI-CE248B_ARGBO_G_20140730142403

(Source: the WSJ)