Yen Falls on Fiscal Stimulus, while Sterling and Aussie Can’t Sustain Upticks

As uncertainty over Japan’s fiscal stimulus roiled the yen and domestic
equities, Prime Minister Abe was forced to announce his fiscal intentions
earlier than he initially intended
.  The JPY27 trillion (~$265 bln)

The details are far from clear,
which may help explain why the dollar is in the middle of the two yen range
  Note the high
for the week was set on Monday near
JPY106.70.  An unspecified part of the spending will be included in fall supplemental budget, which
Japan regularly introduces.  

In addition, there is no
distinction between spending and programs that offer low interest rate
loans.  It is also not clear how much new borrowing in entailed or how it
will be done.
  A Dow Jones
report claiming the introduction of 50-year government bonds was denied.  

Another reason that Abe may have felt
compelled to announce the size of the fiscal plan, which we suggest is
flattered by combining programs and the like, is to create a set of optics that
would encourage not only immediate support for the stock market (Nikkei rallied
1.7%) but also to encourage the BOJ to be similarly bold.

There had been conflicting media reports about the fiscal stimulus, and
there has been no better clarity into the BOJ’s action at the end of the
A newswire poll found 80%
of the surveyed expect the BOJ to take some action, with an increase in ETF
purchases most favored.  However, this alone would not likely satisfy the
government or investors.  There is talk
of adding to it JGB purchases, for which the new supply is not yet publicly

The Australian dollar also has been whipsawed by uncertainty over the
policy outlook.  
  The market went into the Q2 CPI report leaning (~almost 60% chance according to the
derivatives market) toward a rate cut next week.  The headline CPI rose
0.4% in Q2 for a 1.0% year-over-year rate, down from 1.3% in Q1.  This is the slowest pace in almost 20
years.  The RBA puts more emphasis on the trimmed mean and weighted median
measures.  The former was a little firmer than expected, unchanged at
1.7%, while at 1.3% the latter was as

The market reduced the perceived chances of a rate cut next week to
nearly a 50-50 proposition.
  The Australian dollar initially rallied
to around half a cent to $0.7565 but then dropped like a stone and briefly
slipped through yesterday’s lows.  It has been chopping around a
$0.7475-$0.7495 range through the European morning.  On balance, we are still are inclined to look for
a rate cut next week.  

News that the UK grew faster than expected in Q2 was unable to sustain
the higher sterling bias seen in Asia. 
The UK’s first estimate for Q2
GDP draws on around half the data.  It was 0.6% after a 0.4% pace in Q1.  The year-over-year rate ticked up to
2.2%.  The 2.1% surge in industrial production was front loaded in the
quarter, but its was the largest increase since the late 1990s. 
Manufacturing and energy output were strong.  Services rose 0.5%, while
construction fell 0.4%.  

This week sterling has been capped
in the $1.3165-$1.3175 area.
  The lower end of the range seems to be
around $1.3060.  Similarly, the euro has been carving out a shelf in the
GBP0.8340-GBP0.8350 area, above last week test on GBP0.8300 and the previous
week GBP0.8250.  At the same time, despite the probes, it has not been
able to establish a foothold back above GBP0.8400.  

Eurozone money supply and lending figures were
As expected M3 rose 5.0% year-over-year. 
Lending to non-financial corporation and households edged higher to 1.7%. 
The news was unable to breathe fresh life into the lethargic euro
trading.  The single currency was confined
to less than a quarter cent range.  It has yet to make a convincing break
of the $1.10 level but is spending more
time below it than above it.  

The US reports durable goods orders and pending home sales prior to the release of the FOMC statement,
which is the highlight of the session.
The details of the durable goods
orders report will likely be better than the headline.  The report could
also impact last minute adjustments to Q2 GDP estimates.  Pending home
sales are expected to recoup some of the weakness seen in

We expect the FOMC statement to reflect the greater confidence than was
apparent in June.  Economic data has been firm. 
Activity seemed
to pick-up in June.  The global markets have been fairly resilient in the
face of the Brexit decision, the coup in
Turkey (and the bloody aftermath), as well as the depreciation of the Chinese
yuan and Chinese stocks.    The re-introduction of the
risk-assessment would be a way that the Fed can signal that it is still
prepared to raise interest rates.  This
point can also be underscored if there another official joins
George in dissenting from the steady policy the majority will back.  

Speaking of Chinese stocks, a large
loss was recorded Shenzhen (-4.5%) and somewhat smaller loss in Shanghai
(-2.0%), even though the MSCI Asia-Pacific Index managed to rise 0.25% and
extend its gains for a third session.
Reports have linked the sell-off reports that the regulators are going to curb
the wealth management products from investing in some equities and other
assets, such as loans.  


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