Daily Report: BoJ on Hold, Focus on ECB

Euro stays in tight range today ahead of ECB rated decision. President Draghi’s dovish comments in the Jackson Hole conference weeks ago have raised speculations that it might act in September. Disappointing economic data only raised the likelihood. For instance, the final GDP estimate for Germany stayed at an unrevised -0.2% contraction in 2Q14. The reading for the 18-nation Eurozone is expected to remain flat. On inflation, PPI might deteriorated further, contracting -1.1% y/y in July after the -0.8% drop in June. Against this backdrop, we expect modest reduction of main refi rate, i.e. by -10bps, while the marginal lending and deposit rates would also be cut by the same amount. While Draghi’s speech indicated that the inflation outlook has deteriorated to an extent that QE might be needed, with the TLTROs and ABS purchased not yet started, we do not see high possibility that the ECB would accelerate QE measures in coming months.

BoE rate decision is another focus. In August, MPC member Weale and McCafferty voted to increase the policy rate by 25 bps and cited the lagging effect of monetary policies. Both saw signs of accelerating growth that would start to drive faster growth in wages and hence inflation, suggesting that the existing economic backdrop was ‘sufficient to justify an immediate rise in bank rate’. Yet, we doubt if more members would join their camp in September as economic data since then have shown sharply lower inflation, softening earnings growth and lukewarm retail sales. BoE would very likely stand pat and issue just a brief statement today.

BoJ left policies unchanged today as widely expected. Interest rate was held near zero and the target of monetary base expansion was kept at an annual pace of JPY 60-70T. The view on economic outlook stayed upbeat as it noted the economy will continue to “recover moderately as a trend”. Meanwhile, the central bank also expected the negative impact of the tax hike to “wane gradually”. Yen is steady after the announcement.

Overnight, the BOC left the overnight rate unchanged at 1% for the 32nd consecutive meeting. The tone in the policy statement remained neutral but sounded more positive over the exports and housing sectors. Policymakers continued to see inflation as being anchored and the upside was partly driven by temporary factors. The global economic outlook was more balanced with the view that growth in the US was more than offsetting the negative impact of the situation in Ukraine on the recovery in Europe. On the monetary policy outlook, the central bank reiterated that “its timing and direction will depend on how new information influences the outlook and assessment of risks”.

In the US, the latest Fed Beige Book showed modest to moderate growth in activity, although “none of the Districts pointed to a distinct shift in the overall pace of growth”. Consumer spending grew at “slight to moderate” rates while activity among non-financial service sectors improved overall. Loan demand rose in 8 Districts. Developments in employment, wages, and prices were “relatively unchanged”.

Released from Asia, Australia trade deficit narrowed to AUD -1.36b in July, retail sales rose 0.4% mom in July. Eurozone retail sa PMI, ECB and BoE rate decision will be featured in European session. From US, a number of key economic data will be released. That included ADP employment, trade balance, jobless claims, ISM services.

Daily Pivots: (S1) 172.13; (P) 172.74; (R1) 173.12; More…..

Intraday bias in GBP/JPY remains neutral as the pull back from 173.95 continues. With 171.67 support intact, further rally is still expected. Above 173.95 will target 175.36 resistance. Price actions from 175.36 could be developing into a sideway pattern. Thus, we’d be cautious on reversal from there to extend the pattern. On the downside, below 171.67 will turn bias back to the downside for 170.42 instead.

In the bigger picture, the up trend from 116.83 (2011 low) continued to lose upside momentum. This could be seen in bearish divergence condition in daily MACD. And, weekly MACD continued to trend down. However, 169.53 structural support remains firmly intact and thus there is no confirmation of reversal yet. Another rally could still be seen. But in that case, we’d expect strong resistance below 50% retracement retracement of 251.09 to 116.83 at 183.96 to bring reversal. Meanwhile, sustained break of 169.53 support should confirm medium term topping and turn outlook bearish.

GBP/JPY 4 Hours Chart

GBP/JPY Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised

JPY
BoJ Monetary Policy Statement

1:30
AUD
Trade Balance (AUD) Jul
-1.36B
-1.77B
-1.68B
-1.56B
1:30
AUD
Retail Sales M/M Jul
0.40%
0.40%
0.60%

6:00
EUR
German Factory Orders M/M Jul

1.60%
-3.20%

8:10
EUR
Eurozone Retail PMI Aug

47.6

11:00
GBP
BoE Rate Decision

0.50%
0.50%

11:00
GBP
BOE Asset Purchase Target

375B
375B

11:30
USD
Challenger Job Cuts Y/Y Aug

24.40%

11:45
EUR
ECB Rate Decision

0.15%
0.15%

12:15
USD
ADP Employment Change Aug

210K
218K

12:30
EUR
ECB Press Conference

12:30
CAD
Trade Balance (CAD) Jul

0.9B
1.86B

12:30
USD
Trade Balance Jul

-$42.5B
-$41.5B

12:30
USD
Initial Jobless Claims (AUG 30)

298K
298K

12:30
USD
Non-Farm Productivity Q2 F

2.50%
2.50%

12:30
USD
Unit Labor Costs Q2 F

0.60%
0.60%

14:00
USD
ISM Non-Manufacutring Composite Aug

57
58.7

14:30
USD
Natural Gas Storage

75B

15:00
USD
Crude Oil Inventories

-2.1M

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