Risk Sentiment Stays Subdued, BoJ Maintains Ultra-Loose Policy

JFD Brokers
8 min readJan 23, 2019


The Kiwi surged overnight following New Zealand’s better-than-expected inflation data, while the stellar UK jobs report allowed GBP-bulls to stay in the driver’s seat. With regards to the broader market sentiment, investors’ morale took another hit yesterday following reports that the US had turned down China’s offer for preparatory trade talks. That said, equities rebounded somewhat, and the safe-haven yen slid after White House economic adviser Larry Kudlow denied the report. The downside revision in BoJ’s inflation projections may have also contributed to the overnight yen-selling.

NZD and GBP the G10 Gainers, Equities Down, BoJ Trims Inflation Forecasts

The dollar traded within a ±0.20% range against most of the other G10 currencies yesterday, with the exceptions being NZD and GBP, both of which outperformed their US counterpart. The dollar gained, only slightly, against NOK and JPY and CAD.

The Kiwi was the big winner, gaining after data showed that New Zealand’s yearly CPI rate stayed unchanged at +1.9% yoy, instead of ticking down to +1.8% as the forecast suggested. Judging by the market response, some participants may have raised bets that a rate cut by the RBNZ may be now less likely, but let’s not forget that latest GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, well below the Bank’s own projections for the quarter. Although officials may not be tempted to cut rates when they meet next, as they may prefer to wait for more evidence as to whether this slowdown was temporary or not, we expect Governor Orr to keep the option of a cut on the table.

The pound was the next big gainer. The British currency started the day on the front foot, and although it did not react much at the time the UK employment data were out, the stellar report did not prevent the currency from keep traveling north. The jobs report showed that the unemployment rate ticked down to +4.0% in November, instead of staying unchanged at +4.1% as the forecast suggested, while average weekly earnings including bonuses accelerated to +3.4% yoy from +3.3%. The excluding-bonuses rate stayed firmed at +3.3% yoy. Strong wages suggest that inflation may rebound again at some point in the near future, which combined with increased expectations that a no-deal Brexit can be eventually avoided, may have prompted market participants to bring somewhat forth their expectations with regards to the next BoE rate hike.

That said, we still expect the pound to stay more sensitive to Brexit developments rather than economic releases. The currency could remain supported for a while more on speculation that a disorderly withdrawal could be averted, but as we run out of fresh bullish catalysts from the Brexit land, we would take a cautious approach with regards to future gains, as the currency may run out of upside momentum soon.

Now, moving to the broader market sentiment, major EU and US stock indices closed in the red as risk appetite remained subdued yesterday due to concerns over a global economic slowdown as well as skepticism over the US-China trade relationship. Following China’s soft GDP data, the downside revision in IMF’s forecasts, and reports that the US Treasury saw little progress made in the US-China talks with regards to intellectual property, investors’ morale took another hit yesterday on headlines that the US had rejected an offer for preparatory talks from China.

However, during the last hour of the US session, White House economic adviser Larry Kudlow denied the report, which somewhat turned things around. Although they still closed down, US indices rebounded somewhat, and later, China’s Shanghai Composite index ended the Asian session Thursday fractionally positive. Japan’s Nikkei 225 closed negative, but its loses were moderate. The yen, which has been enjoying safe haven flows throughout the day, turned down, and today is found slightly lower against the greenback.

The BoJ decision may have also contributed to the overnight leg down in the yen. The Bank kept its ultra-loose policy unchanged via a 7–2 vote, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around 0%, with officials reiterating that they intend to maintain the current extremely low levels in interest rates for an extended period of time.

With regards to the quarterly report, policymakers repeated that the Japanese economy is expanding moderately and that it is expected to continue to do so throughout the projection period. They also revised up their GDP projections for the fiscal years 2019/20 and 2020/21. However, as we anticipated yesterday, they trimmed further their inflation forecasts for the whole forecast horizon. Now, the Bank expects its core CPI to hit +1.4% yoy in the fiscal year 2020/21, down from +1.5% previously, and well below its inflation objective of 2%. This enhances our longstanding view that BoJ policymakers have a long way to go before they start considering a meaningful step towards normalizing policy.

Nasdaq 100 — Technical Outlook

After a good rally that we saw in Nasdaq 100 from the end of December 2018, the index slid back down and dropped below its medium-term downside resistance line, taken from the high of the 1stof October. This could be seen as a negative sign, at least in the short run. In addition to that, looking at our 4-hour chart of the Nasdaq 100 cash, the index broke through the lower side of the rising wedge formation, which has been in play since the 26thof December. According to the textbook theory, this tends to be a bearish indication and the price could slide a bit further down.

For a better confirmation of the downside, we would wait until Nasdaq 100 breaks below the 6600 level, as this could clear the path towards the next potential area of support at 6510, marked by the low of the 14thof January. If that area is not strong enough to withstand the bear-pressure, a break of it could send the price further down, where the index could meet the 6451 level, marked by the low of the 8thof January.

Alternatively, if Nasdaq 100 gets back above the aforementioned downside resistance line and pushes through the 6740 barrier, this could be a sign that the bulls are not willing to give up yet and we may see a further acceleration of the price. This is when we will target the high of last week, at 6818, a break of which could lead the index towards the 6866 obstacle, or even the 6975 level, marked by the intraday swing low of the 4thof December 2018.

GBP/JPY — Technical Outlook

GBP/JPY is currently finding good resistance near the 142.22 barrier, which continues to keep the rate down. That said, since the 2ndof January, the pair keeps on creating higher lows, trading above its short-term upside support line taken from the low of that day. As long as that line remains intact, we will continue looking in the upwards direction.

If GBP/JPY decides to no longer wait and breaks above the 142.22 barrier, this could open the door to the next potential area of resistance at 143.90, marked by the high of the 13thof December 2018. This is where the rate might get held initially, until the bulls and the bears figure it out over who will take control from there. Of course, there is a chance of seeing a bit of correction then, maybe even back down towards the aforementioned upside support line. But if the line continues to hold the rate from dropping lower, we may see the bulls stepping in again, which could lead to another leg of buying. If the 143.90 area fails to withstand the bull-pressure this time, the pair could travel further up, where the next potential resistance zone might be seen near the 144.60 level, marked by the intraday swing high of the 4thof December.

On the other hand, if the upside line fails withhold the rate from moving lower, this could raise concerns over the pair’s upside potential for the short run. A move below the 140.70 hurdle could clear the path for a further push lower to the 139.50 obstacle, a break of which could keep the bears in the driver’s seat and lead to a test of the support area at 138.60, marked by the low of the 14thof January.

As for Today’s Events

Today, the calendar appears relatively light, with the only top-tier release being Canada’s retail sales for November. The forecasts suggest that both headline and core sales declined 0.6% mom and 0.4% mom, after a 0.3% rise and a stagnation respectively. That said, coming on top of Canada’s better-than-expected inflation prints for December, we doubt that sliding retail sales would be enough to change BoC officials’ minds with regards to more rate hikes over time.

With regards to the energy market we have the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.

As for tonight, during the Asian morning Thursday, Australia’s employment data for December are scheduled to be released. Expectations are for the unemployment rate to have held steady at 5.1%, while the net change in employment is anticipated to show that the economy gained 16.5k jobs, less than November’s 37.0k.

We also have one speaker on the agenda: BoE MPC member Ben Broadbent.


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Originally published at www.jfdbrokers.com.



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