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What to watch this week: Central Banks, GDP, and Confidence

Several reports are arriving this week that are of huge interest to forex and CFD traders. The USD, against major trading partners, could be materially affected by the Monday’s report on Orders of US-made Durable Goods. The rest of the week will see a spattering of Central Bank interest rate decisions and Confidence reports from the US, Japan, and Switzerland.

Read the full story at fxstreet.com

USD/JPY Looking For 100?

We have seen a clear downtrend in the USD/JPY since the U.S peaked in early April. The Coronavirus saw a rush to the cash, specifically the Greenback.

However, with the financial markets roaring back to life since then, the love for the Greenback has faded. Furthermore, many Japanese investors bringing back their capital out of U.S stocks back into their home currency, the Japanese yen. This has pushed the pair lower, with it currently sitting at 106.

This contrasts with the countries' main stock index, the Nikkei 225, which has reached all-time highs touching 30,000. The last time it got close to 30,000 was in 1991, where the index touched 26,000.

If you held the Nikkei 225 from 1991 till the start of 2021, you would have been down 0.4%. In comparison, if you have held the S&P 500 from 1992 till the beginning of 2021, you would have been up around 1000%.

USD/JPY Playing Well In The Channel

USD/JPY downtrend has been following a consistent channel

We can see the USD/JPY adhering to this downwards channel diligently, with a breakout in around June. We are currently witnessing a breakout similar to that in June, and if history is a guideline for the future, we may see the pair retreat back into the channel, possibly hitting the 100 mark in the middle of March.

Japan – A Currency Manipulator?

Many Asian nations, including Japan, have been accused of manipulating their currency, specifically to the downside.

It is estimated that foreign exchange reserves held by 12 Asian nations total more than 6.5. Trillion dollars, up 500 billion to counter the effects of the Coronavirus. Asian countries buy up foreign currency using their own, flooding the market with a flush supply of their currency, pushing their currency's relative value lower. This benefits their exports, as it would be cheaper to purchase their goods in other countries – beneficial when your country is dependent on exports, and you are in the middle of a Pandemic.

This could be why there has been a steady downtrend in the U.S dollar against the Japanese Yen. We saw a steady rise from the start of 2020 in Japan's foreign currency reserves from 1.34 Trillion U.S Dollars to 1.4 Trillion U.S Dollars, an increase of 660 Billion U.S Dollars.

Week ahead - Central banks, CPI's

With the new strain of the Coronavirus causing concern across the world, many countries that continue to battle the Coronavirus hope that the vaccine gives them a head start before the strain does any more damage. This week will also see a new President take office, Democrat Joe Biden, on the 20th January US Local time. Here is your week ahead.

President Elect Joe Biden will be inaugurated on the 20th January 2021.

Monday, 18th January – China's Retail Sales and GDP

It seems like China was on their home run. Cases were initially squashed due to their strict lockdown earlier in 2020. The vaccine's advancement last year was the final factor in cementing China's success against the virus. However, a sharp outbreak in Nangong and Shijiazhuang shows the world that no matter how well your initial response is, only continuous and strict restrictions can keep the Coronavirus out of the community. Five days ago, a plot of land in Nangong, Hebei, laid flat. Now, it has become a 1500 room hospital for Covid-19 patients.

Hospitals quickly being built in Nangong, Hebei

This may be an overreaction by the Chinese government – however, they may just be preparing for the worst. This does give a sign of what the future may hold for countries like the United Kingdom and the United States, where cases are still at record highs. With that said, GDP and Retail Sales are predicted to increase on the back of a boost in the manufacturing sector alongside consumer spending the income they saved during the past lockdown. GDP is expected to rise to 6.1% in Q4, up from 4.9% in the previous quarter. Furthermore, retail sales are predicted to grow. 5.5% in the month of December, ahead of Chinese Near Year.

Tuesday, 19th January – Germany's CPI figures

The Coronavirus situation in many countries highlights the importance of implementing a strict lockdown and following it through. The benefits of a lockdown only work if community transmission is eliminated. However, many countries apart from a small handful tried to balance economic damage alongside the Coronavirus spread, which meant deescalating Coronavirus restrictions too early, rendering the lockdown useless.

Germany's Daily Coronavirus Figures

Germany is one of the nations that deescalated too quickly, causing massive spikes in their Coronavirus figures. Their total cases now stand at 2.04 Million, with German Chancellor Angela Merkel urgently trying to rush in more stringent restrictions to dampen the virus's spread. However, the recent spike is unlikely to affect analysts' expectation of Germany's CPI,s expected to print at -0.7% for the month of December, the same as a month before.

Wednesday, 20th January – United Kingdom's CPI Figures

With just under 3.6 Million initial doses having been handed out to the UK public, the United Kingdom's dire situation looks like it's starting to make a turnaround. The daily Coronavirus rate has slowly decreased in the past couple of days - however, Britons do not seem to be adhering to lockdown and social distancing rules.

The Sea Front in Brighton, England

The third lockdown in the past 12 months, UK citizens have been seen gathering around beaches with no mask on. The UK government is banking on the vaccine to help control the virus's spread, as hospital beds continue to be filled with Coronavirus patients. The CPI is expected to rise by 0.5%, up from 0.3% a month before.

Wednesday 20th January – Bank of Canada's Interest Rate Decision

Canada seems to be avoiding the limelight – however, their Coronavirus cases are continuing to skyrocket after a semi-successful, non-strict lockdown. However, like all countries that did not eliminate community transmission, their cases soared as the latter part of 2020 approached. Coronavirus cases in Canada surpassed 700,000 yesterday.

This may well play into their interest rate decision this week ahead. With the second wave all but destroying any optimism in Canada's economic recovery, analysts predict a rate cut of less than 0.25%, currently at 0.25%. Andrew Kelvin, Chief Canada Strategist at TD Securities, stated that "The fact that the Bank of Canada has kept the door open to ( a rate cut) in the recent month hasn't gone unnoticed by markets."

Thursday, 21st and Friday 22nd January – Australia's Employment Change and Retail Sales Month over Month

The news many Australian citizens wanted to hear – "There are no remaining hotspot definitions," Federal Health Minister Greg Hunt stated at a press conference, with only one community transmission in the past couple of days. However, he warned that their not out of the woods yet, stating that "invevitably, there will be days of new cases. There will be days where there may be a requirement for Commonwealth hotspot definition to be reintroduced. But they'll be done on a the basis of that, and cases". This may indicate that Australia is finally able to start its economic recovery – alongside the implementation of the Trans-Atlantic bubble between Australia and New Zealand. Employment Change is expected to decrease from +90,000 in November to +50,000 in December.

Thursday, 21st January – Bank of Japan's Interest Rate Decision

Similar to Canada, Japan did not implement a proper lockdown. Instead, they opted for an increase in social distancing measures alongside confidence in their citizens to continue to wear face masks. Just like Canada, initial results were promising. However, as the year passed, it was evident that community transmission is inevitable if it was not thoroughly squashed out. Currently, Japan sits on 325,000 Coronavirus cases, with daily cases reaching an all-time high of 8,000 just a couple of days ago. With negative rates in Japan, monetary policy moves to the downside are rare as not to dig a hole the Bank of Japan can not come out of. Chances are, the BoJ will opt for other tools for yield control, such as asset purchases. However, analysts at Bloomberg Economics forecast the BoJ to keep rates as is not only this week ahead but for the whole year.

Busy week ahead. Trade safe, and most importantly, stay safe.

Week ahead - PMI's, Speeches and GDP

As the news cycle slows, with the election in the past alongside initial vaccine hype fading away, it is essential to realize that not only is the Coronavirus continuing to ravage the economy, it continues to ravage the families and lives of many around the world.

Many have turned the Coronavirus into a statistical exercise, looking into the future when we eventually look past the Coronavirus. However, it is currently a present problem, with present consequences. Keep this in the back of your head when you trade and invest. Here is your week ahead.

What meeting did President Trump miss in order to play golf? (Answer at the bottom)

Monday, 23rd November – Germany PMI (November)

Like many countries in Europe, Germany is experiencing a spike in cases larger than the first wave. They recently recorded 23,000 new cases yesterday. This has directly affected service sector activity, with HIS Markit's flash services PMI's fell to 46.2 from 49.5 in the previous month. Remember, a print below 50 entails a contraction in manufacturing. Analysts forecast Germany to post its deepest recession since World War Two.

Monday, 23rd November – UK's PMI's

In terms of the most frustrated, I am at a country in terms of their Coronavirus response; I am most frustrated in the UK.  They had the resources to implement a robust early Coronavirus response. However, Bureaucracy and trying to balance economic damage and human life has placed the UK on its knees.  At its peak, the UK recorded over 34,000 daily Coronavirus cases.

After placing a lockdown on citizens, Prime Minister Boris Johnson plans to end the lockdown on 2nd December. However, daily Coronavirus cases still rack up, around 20,000 per day. For reference, New Zealand and Australia lifted restrictions once there were consistently zero community Coronavirus cases. However, the second lockdown could not push the UK's PMI's further down, printing 45.8 with an analyst consensus for 42.5. However, a third wave will push this figure further down.

Tuesday, 24th November – Australia's Trade Balance

While the Coronavirus stops many businesses from operating, one sector that was affected less was freight. However, with Australia heightening tensions with China, their largest trading partner, their Trade Balance may see a drop in the next print. Canberra's Officials stated that reports on Chinese authorities telling Chinese buyers to stop purchases of Coal, copper, wine barley, sugar, lobster, and timber as "deeply troubling.

"On the other side of the bond, Beijing has accused Australia of "anti-China hysteria," about Australia prompting an investigation into the origins of the Coronavirus vaccine in China. The previous trade balance was 5.63 Billion.

Tuesday, 24th November – Bank of Japan's Governor Kuroda Speech

Japan is one of the only countries that are experiencing the third wave. Each consecutive wave has been larger than the previous in Japan.  The method they have adopted, called the "Japan Model," has effectively curbed the spread of the virus in the country.

However, as the third wave is currently in full swing, experts state that the strategy is approaching its limits. Kuroda predicts that "the economy is likely to hit bottom around April-June and is expected to continue improving as a trend" and that it "will help price growth turn positive and gradually accelerate toward [their] 2% inflation target." He further stated that if they hit their 2% target, an "exit from [their] massive stimulus program will come into sight." However, he believes it's currently premature to do so at this stage.

Tuesday, 24th November – RBNZ's Adrian Orr speech

Having beaten the Coronavirus, New Zealand is well on its way to its recovery. With the RBNZ removing LVR's and lowering interest rates earlier this year to cushion the economic effects of the Coronavirus, they have placed it back, quoting "financial stability". Interest rates continue to be at record lows, allowing investors and first home buyers to attain record-low mortgage rates. This has pushed the average house price of over a million dollars in Auckland for the first time.

House prices have been a heated topic with politicians and citizens of New Zealand, with buyers struggling to get into the market and owners going all to increase their assets. However, the RBNZ refuses to implement policy to house prices, stating that "that is not their mandate", and that their mandate is employment and inflation. Orr's speech this week ahead may further see him cement RBNZ's stance on house prices.

Wednesday, 25th November – GDP and FOMC minutes

The United States recorded 198,585 new cases of the Coronavirus on the 20th November, just shy of the somber record of 200,000. With the country recording an annualized rate of 33.1% during the third quarter showing the effects of government stimulus and quantitative easing by the Federal Reserve, many analysts predict a slowdown in the couple of quarters to come. Aneta Markowska, Chief Financial Economist at Jefferies, wrote in a report to clients on Thursday that "The outlook for Q4 is very shaky in our view" and that "The economy has already lost a lot of momentum over the summer."

Not as a busy week ahead compared to previous weeks. However, news on a Coronavirus vaccine should be watched out for, as it could trigger a risk-on / risk-off event in all assets across the markets. Stay safe, trade safe.

Trump skipped the G20's "Pandemic Prepardness" event to play Golf on that beautiful, cloudy day.

Week ahead – United States Election!

With over 93 Million US Citizens voting early, surpassing two-thirds of all 2016 and consisting of 43% of registered voters, the United States election is finally two days away this week ahead. Many regard this as one of the most important Presidential Elections in history, possibly changing society's fabric in the United States for the foreseeable future.

Although the Presidential Election will probably get most of the attention, this week continues to be eventful with a lot of data being released. Here is your week ahead.

Dates are in NZDT.

FiveThirtyEight predicts in 20 out of 22 scenarios Biden will win the Presidency

Monday, 2nd November – US ISM Manufacturing

A key point in Trump's campaign in 2016 was his promise to bring jobs back to America. However, an amended NAFTA agreement, alongside many more amendments to foreign policy, has lost many manufacturing jobs. For example, over one in four Michigan manufacturing jobs have been lost since the NAFTA agreement amendment.

The Coronavirus has just brought more pain to the sector, with an estimated 381,000 manufacturing workers in Michigan, Ohio, Wisconsin and Pennsylvania were laid off or furloughed – with all, but one (Pennsylvania) states being in the midwestern part of the USA. These states were one of the key reasons why Donald Trump was elected in 2016.

As states slowly open up, the Coronavirus continues to run rampant, affecting workers employed in the manufacturing sector. Unlike the tech and finance sector, manufacturers can not work from home. With that said, the US's ISM is predicting to increase slightly from last month to 55.6 this week ahead, as suppose to 55.4 last month.

Tuesday, 3rd November and Wednesday, 4th November – RBA Interest Rate decision and Australian Retail Sales

Australia reached a positive milestone yesterday – zero community transmission. The country has a long road to recovery ahead of them, and the Reserve Bank of Australia acknowledges that. With dovish tones in the previous RBA minutes, analysts predict a 150 point basis cut, from 0.25% to 0.1% tomorrow. However, Insight Manager at Finder, Graham Cooke believes that further cuts will not make dramatic changes to the finances of ordinary Australians, stating that "a further 10-15 point basis cut us unlikely to have much of an impact on the economy –however, our experts seem to think that the RBA is in "every little bit helps" mode."

Furthermore, Retail Sales will also be released a day after the decision. Analysts predict a further 1.5% decline in Retail Sales as the Coronavirus continues to take a longer-term toll on employment.

Wednesday, 4th November – US Presidential Election.

The event everyone and I mean everyone, including your mother, will be watching.

There is nothing much to say about this other than to buckle in. Many polls state that Biden is likely to win. FiveThirtyEight predicts that in 20 out of 22 scenarios, Biden is stated to win. Other polls from firms such as RealClearPolitics see Biden leading over 9%.

Judging by the polls, the only way Trump can win is if he wins all of the swing states. The popular vote in NYC and California have Biden to win anyways, which means the popular vote will be absorbed within the Electoral college (tl:dr, the RealClearPolitics poll may be closer than is stated).

However, the polls showed Hillary winning in 2016. And we all know what happened then.

Friday, 5th November – Bank of England Interest Rate Decision

The UK struggling with lackluster leadership

The UK has finally imposed a stricter lockdown (however, not a full lockdown) on citizens for one month, with analysts predicting that the lockdown may be extended further to allow the UK to have their Christmas not under lockdown. The Bank of England is set to inject over 100 Million pounds buying back bonds to fight the second wave.

However, this may not be enough, with analysts at HSBC predicting that the BoE's bond-buying regimes are "running out of room," which may leave the central bank with no choice but to implement negative rates. Governor of the Bank of England, Andre Bailey, has not ruled negatives rates but has described evidence of their effectiveness as "pretty mixed" and that negative rates might be most effective when an economy is in a recovery phase for the economy to take full advantage of the negative rates. Analysts predict rates to stay at 0.1%.

Saturday, 5th November – US Non-Farm Payroll

A key indicator showing how well the US economy is recovering, Non-farm payrolls is predicted to print 700,000 new jobs, up from 661,000 the month before.

This week ahead is going to be a turbulent one. Strap yourself in, and brace for the ride.

Stay safe, Trade safe. Have a good week!

Goodbye, Abenomics, Hello… Suganomics?

After two official terms and nine years in office, Shinzo Abe is stepping down as Prime Minister of Japan. He is replaced by 71-year-old Yoshihide Suga, formally the Chief Cabinet Secretary but informally, Abe's right-hand man. The question becomes, will Suga try and reinvigorate Japan's Economy using new methods, or will it be another term of Abenomics, without the Abe?

Yoshihide Suga

Who is Yoshihide Suga?

Born as a farmer's son, Suga has been touted as a "behind the scenes" deal maker, highly demanding and not afraid to side-line individuals who do not perform or are not aligned with his thinking. Suga pushed his administrative reforms through Japan's often strong bureaucracy, sometimes using heavy hand tactics. This contrasts with Shinzo Abe, who was a son of a political dynasty, who was groomed to be in office from a young age.

What will his effect be the Japanese Economy?

Being Abe's right-hand man, its not surprising that political analysts predict little change to how the Japanese Economy is run. Kazuto Suzuki, a vice-dean and professor of International Politics at Hokkaido University, stated that "Suga is expected to be an "Abe Substitute," which helps us better understand to what the future holds with Suga at the helm. Furthermore, Etushi Tanifuji, a political science professor at Waseda University, stated that "Suga does not have a grand vision for Japan and is more of a problem solver, which worked for him as chief Cabinet Secretary but could be problematic as Prime Minister." Etushi also states that Suga is not the type of politician to have an "ideology" that "they act with.. as their guiding light" like other politicians do.

If that's the case, will it be another term negative rates and QE?

Possibly. CNN states that he was an essential ally to Abe's efforts enacting his series of economic policies – famously known as "Abenomics." The question arises whether we will see Suga deviate away Abenomics in pursuit of "Suganomics," whatever that may be – or will we see Abenomics 2.0?  Suga has not released any official policies that he promises to enact, primarily because he did not really have to win any voters as he was voted in by his party. However, we can try to analyse what will happen if there is a continuation in "Abenomics" in this post Coronavirus world.

Abenomics in a nutshell

Abenomics consists of three parts, or three "arrows" – aggressive monetary policy, fiscal stimulus, and policy reform. Abenomics was an attempt to reinvigorate Japan's Economy from a slump after a real estate and stock market burst in the early 1990s, leading to two decades of no nominal growth in the Economy.

Chart shows Japan's GDP. You can see the period between 1990-2012, before Abe's term, saw Japan exhibit no nominal growth

In general, Abenomics was successful in deterring deflation. However, it has not been able to spur inflation back up. Throw in the Coronavirus pandemic, and that goal is all but unachievable.

The current issue with Abenomics is that it struggled to spur inflation during a period of expansion in the Economy. With the Coronavirus forcing central banks and government to prop their respective economies back up, Japan doesn't have much monetary room left to give due to most of it being spent on Abenomics.

Abenomics + Coronavirus has put Japan between a rock and a hard place. Propping up the Economy will essentially spur a period of Abenomics on steroids. However, that only brings Japan back to a Pre-Coronavirus situation – which was not the best place to be in.

We can only hope that Suga comes in and attempts to spur Japan's Economy by implementing contrarian policies. However, Suga's role may merely be a formality rather than a symbol of a brighter future.

Anish Lal, did some amazing analysis on the USD/JPY and the potential moves it may make during Suga's term. You can watch it here. 

Week ahead: Central banks and GDP

A hectic week ahead as companies and countries start to position themselves to exit the pandemic in the best shape possible. Total Coronavirus Cases top 29 Million, with over 924 thousand deaths. Here is your week ahead.

Monday, 14th September – UK Parliamentary vote on Brexit

Boris Johnson has stated that he plans to change part of the terms in the Northern Ireland Protocol. Johnson agreed to keep the border open between the UK and Ireland a year ago. However, he plans to renege on this agreement bypassing UK legislation to override the clause. This has caused a stir between the EU and the UK as if the legislation is passed, would technically be violating international law. This has forced the UK's top government lawyer to quit in protest). This is on top of a possibility of a no-deal Brexit; amongst the global pandemic that has consumed every single politician's attention, a further wrench in the works may send the markets swinging this week ahead.

Tuesday, 15th, Wednesday 16th and Thursday 17th September – UK Unemployment Rate 3 months, UK CPI and Bank of England Monetary Policy decision

An Institute for Employment Studies Freedom of Information requests showed that 380,000 jobs were planned to be cut from May to July in the UK this year. In comparison, around 180,000 job cuts were planned from January to March 2009, around the financial crisis. The UK has taken a massive hit due to the Coronavirus, with cases continuing to rise even after the first lockdown. Social distancing measures have forced lower traffic to shops, forcing redundancies, which forces a vicious cycle. The Market predicts a 3.9% unemployment rate, which is identical to the rate three months ago. However, the CPI is predicted to increase by 0.3% by 1.3%, showing the potential effects of inflation on the UK economy.

The Bank of England, like many other central banks, are set to keep rates as is at 0.1%.

Wednesday, 16th September – US Retail Sales MoM

As US-China Tensions starts to ramp up before the election period, eyes on the consumer, which were regarded as the "Backbone of the economy" before the pandemic, has stayed relatively healthy due to government stimulus. With US retail sales rising three months in a row, economists predict that with stimulus checks ending soon, US consumers' total income should decrease, therefore seeing a drop in retail sales this month. Analysts expect a 0.1% decrease in retail sales to 1.1% in the next month.

Wednesday, 16th September - Fed Interest Rate Decision

As the Federal Reserve kicks into gear their higher inflation tolerance, the Market has its eyes set on any other support from the Federal Reserve to support the United States recovery. The Market predicts, like always, for the Fed to keep rates as is at 0.25%.

Wednesday, 16th September – GDP New Zealand QoQ and YoY

With New Zealand being touted as one of the most prosperous countries in trying to curb the Coronavirus, the country of 5 million is not immune to the economic damage caused by the virus. The country is set to see a GDP contraction the largest in history, with the Reserve Bank predicting a -14.3% fall in GDP growth. The Reserve bank is looking to Sweden as a template for negative rates. The currency markets pricing in a 72% possibility of the RBNZ cutting rates below 0% in February next year.

Thursday, 17th September – Japan BoJ Interest rate decision

With Yoshihide Suga being voted in by the party as the replacement of the current Prime Minister Shinzo Abe, Japan is currently enduring a turbulent period as it continues to grapple with the Coronavirus. Cases in Japan have recently been surging, as a reopening of the economy with no official lockdown has come back to bite the country. With declining GDP pre coronavirus, the Bank of Japan is set to keep interest rates as is at -0.1%. It is interesting to note that all the central banks with negative interest rates have left rates during the pandemic.

This week, with M & A kicking into gear, alongside further political action and central bank decisions, this week will undoubtedly be an extremely busy week ahead in the markets. Trade safe!

Central banks! Your week ahead

Central banks, central banks, central banks. This week ahead, central bankers from all around the world will conduct their annual Jackson hole meeting in which historically they discussed the macro-environment and, of course, monetary policy. However, due to Coronavirus restrictions, they cannot meet at Jackson Hole for the first time in 40 years. Like many meetings, they will be hosting a virtual meeting, available for the public to tune into. The main focus? “Navigating the Decade Ahead: Implications for Monetary Policy” – Or put simply, Monetary policy: Coronavirus edition. Here is your week ahead.

Wednesday, 26th August – U.S. Durable goods order

The Coronavirus continues to ravage the United States, with no visible end in sight. Currently, the United States recorded 48,163 new cases today, with 1,013 deaths. It is an awesome sight (the literal meaning of awesome, as in awe-some) as the U.S. stock market continues to rally to new highs, and billionaires see their wealth surge. The U.S. Durable Goods Order figure measures the cost of orders received by manufacturers for durable goods, including vehicles and appliances. As these are significant investments, they provide a good bearing on U.S. consumers (buying a new car when you just got laid off is unlikely). Therefore a higher than expected figure should boost U.S. equities and the U.S. dollar. The previous print was at a 7.6% increase in the cost of durable goods purchased, with consensus to see that number rise only 3.6% this month. 

Thursday, 27th August – Switzerland GDP Quarter over Quarter

With just under 40,000 confirmed cases, it is fair to say that Switzerland and many nations are continuing to grapple with the fight against the Coronavirus. However, just like with many other European countries, Switzerland is experiencing a resurgence of the virus. Switzerland recorded more than 300 new Coronavirus cases on Friday just before their quarterly update on Thursday. Analysts predict a print of -8.7% decline in GDP, from a 2.6% decline in the first quarter. 

 

Thursday 27th August – Jackson hole meeting, US GDP, Fed Jerome Powell Speech and Bank of Canada’s Governor Bailey Speech

Obviously not in Jackson hole due to the Coronavirus, Central banks from all around the world will host an online meeting discussing how monetary policy will be affected in the future from the Coronavirus pandemic. For the first time in 40 years, not only will the meeting not take place at Jackson Hole, but the conference will be available for the public to watch live. Furthermore, US GDP figures alongside both Fed Chairman Jerome Powell and Governor Macklem from Bank of Canada is set to speak. There is no doubt that this will be a stormy day in the markets.

 

Friday, 28th August -BoE  Governor Bailey speech

The United Kingdom continues to record new Coronavirus cases, logging over 1,041 new cases today. Investors and traders are wary of the possibility of negative rates in the future, with Deputy Governor Dave Ramsden stating that the BoE has “further headroom” to go with regards to monetary policy. The Bank of England currently holds interest rates at 0.1% and maintained its 745 Billion asset purchase target. They predict that the U.K. economy will not return to its pre-Covid levels until the end of 2021. 

 A big week ahead with monetary policy and forecasts from top Economists and Central bankers. Trader and Investors should be wary of the speeches ahead before placing any trades this week. 

We're starting something new this week! If you prefer to listen to the articles rather than reading them, we will slowly make them available on all platforms where podcasts are supported! For now, you can listen to the article here.

 Safe trading!  

UK CPI, Japan GDP - Week ahead

There will be a week ahead post where the data being released will revolve around how well the economy chugging along, and analysts will argue whether a country has reached its peak or whether the NASDAQ is undervalued at 40 times earnings. However, this week isn't that week. Coronavirus continues to be the primary context around headlines, showing that we are still in the pandemic's neck. I have a feeling that it will be like this until real progress regarding a vaccine is achieved. Here is your week ahead.

Sunday, August 16th – GDP of Japan, Quarter over Quarter

Japan continues to post significant Coronavirus figures, with over 1,200 Saturday, topping 1,000 for the third straight day with cluster outbreaks as summer holidays begin. Initially praised for their laissez-faire regarding their quarantine strategy, i.e., has come back to bite them. However, unlike New Zealand, where they essentially forced everyone back into their homes at the slight hint of a potential outbreak, Japan continues to allow its residents outside. For example, they placed restrictions on the maximum number of spectators, concerts, professional sports, and other events – to 5,000. This has made analysts wary of Japan, considering they had low GDP growth before the Coronavirus pandemic. Analysts predict a contraction of 7.3% last quarter, at an annualized pace of 26%. A 7.3% contraction this week ahead would mark the largest GDP decline post-world war.

Tuesday, August 18th – RBA Meeting minutes, report

Like Japan, Australia was praised for its laissez-faire approach resulting in early positive results in Coronavirus cases. However, also similar to Japan, that approach has come back to bite them. Most notably in the state of Victoria, in which the Coronavirus has run rampant. Although the rate of daily increase in cases has slowed down due to the Premiere of Victoria, forcing a mandatory quarantine to all citizens, they are still recording triple-digit cases regularly. They recorded 279 new cases today, with 16 deaths. However, this is an improvement from 2 weeks ago, when they were recording jumps from 200 to 700 new cases in a day. Australia's RBA before the "second wave," took a confident approach that Australia would be capable of pulling out of the pandemic similar to New Zealand with a lower economic cost, and their monetary policy showed that. However, due to the second wave, the report being released will likely be extremely dovish and hint and further rate cuts in the future.

Wednesday, August 19th – UK CPI figures

The UK has seen its Coronavirus curve slowly rise, and that has made government officials anxious. They have recorded over 1,077 new Coronavirus cases in the pasty day, which is slightly under their 1,097 seven-day moving average. However, analysts predict CPI a small change from a 0.6% increase in the CPI to a 0.7% increase this week ahead. If the increase is larger than expected, we should see the GBP strengthen against its peers.

Wednesday, August 19th – Canada CPI Year over Year

Canada was one of the only nations to not impose a strict lockdown for its citizens and come out flattening the curve. Yesterday, Canada confirmed 237 new cases. While not entirely eliminated, the country has not experienced breakouts similar to that of Japan and Australia. Previously, the CPI was up 0.7% compared to a year ago, with analysts predicting a CPI increase of 0.2% this week ahead. With such wild variations, it is yet to be seen what the CPI is going to be. However, a rise in CPI signals a bullish stance in the Canadian dollar, with a hawkish central bank.

Thursday, August 20th – USA FOMC Minutes

The United States is not close to flattening the curve.

A staggering number: 5,565,114 Coronavirus cases, 173,080 deaths – a 6% mortality rate. The United States has not been able to flatten the curve. With an election coming up, President Donald Trump has tried to re-open the economy to boost his chances come election time. However, this has not worked. His selflessness has cost many people their lives. Usually, a market-moving event, TD Securities analysts noted that "at the July FOMC meeting, the Committee did not imitate any new policy actions, and that changes to the statement were minor." Combining this with August being a month were a lot of traders and managers take leave for their summer holidays, we should expect this to be relatively non-market moving.

As stated above, this month tends to be quite slow due to many traders, investors, and asset managers taking leave for the summer holidays. Therefore, the market should be relatively muted at this time. This may be an excellent opportunity for traders and investors to backtest their strategy or even paper trade to practice for the coming months. Many elections are coming, such as the United States and New Zealand general elections, which will cause significant market moves.

Trade safe! Have a good week ahead.

Battle between the safe havens: USD vs JPY

The Dollar Index at the peak of the Coronavirus lockdown rallied, almost touching 103 – the highest level since 2017. The Dollar index shows the relative strength of the USD to a basket of other currencies. However, a couple of currencies strengthened as everyone was hoarding the USD – The JPY.

The U.S Dollar Index
USD/JPY

If the JPY got stronger, why was everyone talking about USD being a safe haven?

The strength in the US dollar was primarily due to market participants selling risky US-based assets such as US equities due to the market turmoil. As investors and traders sold their assets, they were getting paid in US dollars, pushing the US dollar demand.

 

Why did the JPY rally?

I guess you would call this the “OG” Safe Haven. With the appreciation of the US Dollar relative to other countries but the Japanese Yen, there was a net increase in demand for the Yen relative to the US Dollar. There are many factors as to why the Japanese Yen appreciates during times of uncertainty, with one factor explaining that net demand increase – Japanese citizens’ net foreign assets peaked to 726 Billion in 2019. However, once risk-off events occur, there is a repatriation of those foreign assets (often denoted in US Dollars) bank into their home currency, the Yen. Although Government Debt to GDP is around 230%, Japanese citizens do not share this trait of excess debt. As the New York Times stated, “The Japanese Government is in deep debt, but the rest of Japan has ample money to share.”

The JPY Carry Trade

Another reason may be due to traders winding down their “positive carry” trade. In short, by buying a currency with a positive yielding interest rate and shorting a currency with an interest rate less than the currency you purchased, the overnight swap fee is positive. This is because the interest you gain by holding the former currency is less than the interest you pay shorting the latter currency. With the Bank of Japan having negative interest rates since 2016, it has been a popular short for the carry trade with currency with a relatively higher interest rate like Australia. However, in risk off events such as the Coronavirus, positive yielding currencies tend to get their respective central banks cutting rates, making the carry trade less profitable. Therefore, traders cut their positions, which requires them to cut their positions, buying back the Yen they shorted, increasing demand.

However, one of the main reasons the JPY appreciated against the USD during peak lockdown was because people believe that it is a safe haven. It does not necessarily matter why it is, only that people believe it is. If you know the relationship between risk-off and the Yen's appreciation, then you assume it to be true.

 

Correlation between Risk and the JPY

Since the market has generally been risk on/off due to the Coronavirus, it would be interesting to see whether the Yen has played out as a safe haven. If we take 20th March as the start date (peak of the Dollar index this year) and compare the prices of the SP500 and the USD/JPY pair, we find a correlation of -0.498 (~-0.5). This means on average, a 1% increase in the market, there is a 0.5% decrease in the JPY (vice versa). This shows a relatively strong relationship between risk-on and risk-off assets as off late. In comparison, the average correlation between the SP500 and the USD/JPY pair has been around -0.28. 

 

Which is better for your portfolio – the JPY or the USD?

 

The USD is likely the better choice for your portfolio as this enables you to enter into positions when the time is right. However, it may be worth noting this relationship for swing traders if you want to take advantage of risk on/risk off situations.