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USDJPY Surges Ahead Of BoJ Statement, China Strengthens Yuan As Washington Folds On Cybersecurity Sanctions

It appears someone is betting on Kuroda and his cronies to do something later this evening (just like they did as The Fed stopped QE3 back in October) in some wierd monetray policy quid pro quo of - dump Yen all you like as long as the carry trade is alive and well. USDJPY is up from 119.85 to 120.50 (and NKY up over 400 points from US session lows), as perhaps the fact that The BoJ's ETF-buying kitty is running dry at a crucial time. Chinese equity markets are extending yesterday's losses as margin debt declines to a 9 month low (still +62% YoY), injects another CNY50bn and strengthens the Yuan fix for the 3rd day in a row; but in a somewhat embarrassing move, Washington has decided not to impose sanctions on China ahead of Xi's first state visit next week.

 

Japan was excited...

JPY dumping against the USD is some odd anticipation of moar QQE from Kuroda...

Because the last 10 have worked so well.

This is what the big banks think...

Goldman Sachs: A key focus point in BOJ Governor Kuroda’s press conference will be the potential influence of the US FOMC rate hike on the BOJ’s decision making on its own monetary policy given that the FOMC will have its policy meeting on Sep 16-17. The other point is the impact of the renewed crude oil price decline and foreign demand risk on the BOJ’s 2% inflation target and the BOJ’s responses to this impact

 

We can find little in the way of hard data to corroborate the BOJ’s “virtuous circle” between wages and consumption. BOJ governor Haruhiko Kuroda spoke recently in New York about a second virtuous circle which sees rising corporate earnings spurring capex, but this is also looking somewhat tenuous, in our view. The BOJ has tended to focus only on the fall in crude oil prices as a reason for the recent CPI slowdown. That said, we think the BOJ will be eventually acknowledge rising downside risks in the much more fundamental form of the output gap, wages and inflation expectations, all of which the BOJ itself has said will be key to gauging the medium-term price outlook. Accordingly, our base scenario is still premised on the BOJ easing monetary policy further at its end-October monetary policy meeting.

 

The exhaustion of additional monetary stimulus options is something of a problem. We think it would be difficult for the central bank to accelerate JGB purchases from the current ¥80 tn per year given the gradual reduction in the scope for purchasing.

 

BoAML: Taking a broader view of Japan’s economic outlook, we identify three check-points for maintaining our (and probably BoJ’s) optimistic view. First, non-financial corporations' profit margins reached an all-time high in 2Q, as shown in Financial Statements Statistics of Corporations by Industry, and conditions for corporate earnings are good. Although margin improvement has started to feed through to capital expenditure and household income / consumption, the current pace is still moderate. Whether or not this benign cycle of earnings translating into expenditure accelerates far enough in 3Q onwards for the government and BoJ to achieve their policy targets will be one key element to watch. Second, trends in the US economy here on. We believe contribution of external demand to 3Q growth will be zero or slightly negative. Japan’s exports to China are expected to remain weak, affected by the slowdown in China. In this context we believe the extent to which a revival in Japan’s exports to the US (via the economic recovery there) can offset the weak exports to China will be a key aspect in external demand outlook. Third, impact of the turmoil in the financial markets since mid-August. Our main scenario is for heightened risk-aversion in the financial markets proving temporary. However, if a 10%-plus rise in the yen and/or a fall in the stock market were to persist (Nikkei 225 drops below 18,000, or yen appreciates and approaches ¥115/$), this will likely have a material impact on Japan’s economy, and hence, merits continued vigilance.

 

Citi: With renewed weakness in crude oil prices since summer partly reflecting worrisome developments in the Chinese economy, the BoJ’s scenario for the CPI reaching the vicinity of 2% YoY around the first half of FY2016 now looks even less likely to materialize, in our view. However, if inflation does not pick up as policymakers anticipate solely because of declining energy prices, the BoJ may not take additional easing measures unless inflationary expectations are affected negatively. We note, however, there are already early signs for declining inflationary expectations, albeit still tentative at the moment.

 

Deutsche: The question is whether the BoJ will ease further, but we see little likelihood of this. The BoJ will probably only ease further in response to events that would make the outlook for 2% inflation impossible. Inflation expectations could fall due to a decline in oil prices like last year, but oil prices have not fallen to the extent they did in 2014. In addition, regarding the output gap, BoJ Governor Haruhiko Kuroda at the Upper House Financial Affairs Committee on the 10th said "There is a good chance that GDP will be positive in Jul-Sep", indicating that he does not anticipate a decline in the underlying trend in inflation due to economic deterioration. If the BoJ does ease further we expect it would focus on qualitative measures such as increasing ETF purchases and extending the duration of JGB purchases. In that case, we expect the superlong sector would outperform. Kuroda indicated on the 10th that the Bank was not considering reducing or abolishing the IOER rate. A rate cut, including negative rates, is unlikely. BoJ Board Member Sayuri Shirai's panel discussion remarks on the 8th gave numerous reasons for maintaining the IOER rate, but we see one compelling explanation for why the Bank cannot use negative rates. Excluding the BoJ, the banks' surplus deposits have enabled the smooth absorption of JGBs equaling over 200% of GDP. The probability that negative rates would destabilize the JGB market therefore makes such a policy unlikely from the perspective of managing national risk.

Which can all be summed up thus - "we do not think The BoJ has any good reason to ease tonight... but then again, you never know!"

So, of course, where USDJPY goes - so goes Nikkei 225... Up 400 points from US session lows...

*  *  *

Then China slams open...

With an immediate ban on anything that doesn't say "everything is awesome"

  • *CHINA TO SHUT STATE CULTURE COS. WITH IMPROPER CONTENT: XINHUA

More open mouth operations...

  • *CHINA SHOULD STABILIZE YUAN INSTEAD OF LET IT FALL: INFO DAILY
  • *UNCERTAINTY BROUGHT BY YUAN FALL WOULD HURT EXPORTS: INFO DAILY

China strengthens the Yuan fix for the 3rd day in a row and inject snoather CNY50bn

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3665 AGAINST U.S. DOLLAR
  • *PBOC TO INJECT 50B YUAN WITH 7-DAY REVERSE REPOS: TRADER
  • *HONG KONG DOLLAR QUOTED NEAR UPPER END OF PERMITTED RANGE

After last night's tumble...

 

Chinese equity markets are extending losses at the open...

  • *FTSE CHINA A50 SEPT. FUTURES ADVANCE 0.5%
  • *CHINA'S CSI 300 INDEX SET TO OPEN DOWN 2.2% TO 3,208.74
  • *CHINA SHANGHAI COMPOSITE SET TO OPEN DOWN 2.3% TO 3,043.80

But flows continue to leave...

  • *CHINA END-AUG. EQUITY FUNDS NET VALUE FALLS 44% ON MONTH

As delveraging continues...

  • *SHANGHAI MARGIN DEBT BALANCE FALLS TO NINE-MONTH LOW

But bear in mind, margin debt remains +62% YoY...

*  *  *

And finally, Washington folds ahead of China's visit... (as WaPo reports)

The United States will not impose economic sanctions on Chinese businesses and individuals before the visit of China President Xi Jinping next week, a senior administration official said Monday.

 

The decision followed an all-night meeting on Friday in which senior U.S. and Chinese officials reached "substantial agreement" on several cybersecurity issues, said the administration official, who spoke on the condition of anonymity because of the topic's sensitivity.

 

The potential for sanctions in response to Chinese economic cyberespionage is not off the table and China's behavior in cyberspace is still an issue, the official said. "But there is an agreement, and there are not going to be any sanctions" before Xi arrives on Sept. 24, the official said.

 

The breakthrough averted what would have raised a new point of tension with the Chinese that could have overshadowed the meeting — and Xi's first state visit.

 

"They came up with enough of a framework that the visit will proceed and this issue should not disrupt the visit," the official said. "That was clearly [the Chinese] goal." 

Charts: Bloomberg