Daily Market Digest: BoJ holds policy, weak US GDP

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The markets got an early dose of volatility as the Bank of Japan left monetary policy unchanged, much against market expectations. US Q1 GDP estimates were weaker than expected, rising 0.50% in Q1, 2016

Today’s Economic events

  • Japan household spending y/y -5.30% vs. -4.0%
  • Tokyo core CPI y/y -0.30% vs. -0.30%; national core CPI y/y -0.30% vs. -0.20%
  • Japan unemployment rate 3.20% vs. 3.30%
  • Japan retail sales y/y -1.10% vs. -1.40%
  • Japan preliminary industrial production m/m 3.60% vs. 2.90%
  • Australia import prices q/q -3.0% vs. -0.90%
  • BoJ leaves monetary policy unchanged
  • BoJ Core CPI y/y 1.10% vs. 1.20%
  • Spain flash CPI y/y -1.10% vs. -0.70%
  • US Advance GDP q/q 0.50% vs. 0.70%
  • US weekly unemployment claims 257k vs. 258k

Coming up

  • New Zealand building consents

BoJ refrains from easing. Yen rallies!

The markets were once again caught off guard into the BoJ’s monetary policy event, which saw the Japanese central bank refrain from easing monetary policy, much against what the markets were expecting. Contrary to speculation fueled by rumors and reports about the BoJ planning to come out ‘big’ with its easing plans today, the BoJ Governor struck a quiet tone in the markets, leaving the central bank key lending rate at -0.10% and the QE purchases unchanged at 80 trillion yen. In a volatile situation where the markets were pricing in a strong chance of the BoJ to act, this morning’s news saw the yen rise sharply across its peers, with mounting losses seen across the board. The yen gained over 3.0% against the US dollar falling to 108 levels while the Nikkei stock average fell 3.60% by market close.

Yuji Saito, head of foreign exchange at Credit Agricole said “the market was very surprised, before the decision; foreign hedge funds had been expecting a bazooka. They had bet too much on the yen weakness.”

FOMC strikes a neutral tone

The late NY trading session yesterday saw the Federal Reserve conclude its two-day monetary policy meeting. Keeping the Fed funds rate unchanged at 0.25% – 0.50%, the FOMC’s statement was largely neutral, feeding both the bulls and bears. There was only one dissenter, Esther George, Fed president from Kansas City, who wanted to see a 25bps rate hike. The FOMC statement acknowledged that strong growth in the labor markets is noting that the unemployment rate held up despite domestic weakness. While the markets are not sure as to what the next policy decision may be, the Fed funds futures rate inched higher with a 15% probability assigned for a 25bps rate hike; this is up from the previous 1.20% probability for the same.

The US dollar was little changed after the Fed’s release. Win Thin, a currency strategist at Brown Brothers Harriman, said “the statement keeps the possibility of a rate increase at the Fed’s June meeting on the table. But first, the Fed needs to see data indicating that the U.S. economy is improving. I think the market is a little skeptical about a June hike,” he said.

US first quarter GDP slowest in two years

The first quarter GDP data from the US expanded at one of the slowest paces in over two years, rising a meager 0.50%, according to data released by the Commerce Department today. Analysts were expecting to see an increase of 0.70% – 0.60% for the period. Although subject to future revisions, the initial GDP estimates underline the economic headwinds in the country which has been plagued by weak manufacturing. US businesses continued to trim their excess build-up in inventories removing $17.5 billion of the GDP while government spending increased moderately. The annualized GDP price index which measures the changes in the price of goods and services included in the GDP increased 0.70%, beating forecasts of 0.50%, but still lower than 0.90% increase in the previous quarter.

Institutional call of the day – NZDUSD, SocGen*

Societe Generale notes that it is short on NZDUSD, in a trade note released on Wednesday. It noted short positions at 0.685 targeting 0.64 with stops near 0.71. The short bias comes as SocGen notes that despite the RBNZ staying off rate cuts at yesterday’s meeting; it believes that this is only a temporary pause. Societe Generale’s trade bias is in contrast to that of RBC, which entered a tactical long position on Monday at 0.6867 for 0.7050 target.

NZDUSD posted a strong rally yesterday and maintains a short-term bullish bias after the RBNZ left rates unchanged yesterday. NZDUSD is trading at 0.695 currently.

* Institutional Call of the day is not a recommendation or an endorsement by Orbex.com to buy or sell


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