BoJ under pressure, Brazil's real tumbles

Forex News and Events

Japan’s CPI on the soft side (by Yann Quelenn)

Japan’s September national CPI was released last night and was perfectly in line with expectations at -0.5% y/y. No upside surprises have taken place and the Japanese economy remains largely in deflation. Energy prices are also stalling below $50 a barrel, however upward pressures are fading. Markets are not expecting yet further action to come out of next week’s BoJ monetary policy meeting. The BoJ is now shifting policy framework targeting Japan’s yield curve.

The central bank has reached its limit in terms of its effectiveness, having exhausted the tools at its disposal. We believe that the volume of asset purchases cannot be increased or the BoJ will have to further deepen its negative interest rates. On top of that the central bank now owns around one third of outstanding Japanese Government Bonds.

As a result, upside pressures on the yen should continue. In our view, helicopter money is clearly the next step for Japan. The BoJ is now praying that the Fed will raise rates in December which would reduce upside pressures on the yen. However, a December Fed rate hike is already quasi priced in by markets so the BoJ is actually waiting for a continued normalization of interest rates. The future does not seem bright for the island nation.

BRL fell 2% despite austerity bill (by Arnaud Masset)

After rallying in the first part of the week, the Brazilian real came quickly under pressure as the positive effects stemming from the approval by the lower house of the constitutional amendment to cap spending on social welfare faded away. The unelected and very unpopular president, Michel Temer, was able to count on support from the entire political class to pass the PEC 241 at the Chamber of Deputies. The measure, aimed at limiting the growth of public spending to the rate of inflation of the previous twelve months will likely hurt the most disadvantaged Brazilian citizens as it will significantly reduce health and education programs, from school funding to disease prevention.

Temer’s manoeuvre will most likely please financial markets in the short to medium-term as it will help to shore up Brazil’s finances. However, on the longer term, these public spending cuts could be seen as a cut in investment, which would eventually weigh on the potential growth outlook.

On the data front, the last mid-month inflation report showed that inflationary pressures have eased slightly in October, softening from 8.78%y/y in September to 8.27% in October and beating the median forecast of 8.29%. In the COPOM, minutes released last Tuesday, in which its trim interest rate by 25bps, bringing the Selic rate down to 14%, the Brazilian Central Bank (BCB) emphasized the need for caution in monetary easing as inflationary pressures remain strong. The easing will likely be slow and gradual, which will provide the BRL with solid demand as traders ride the carry trade. The Brazilian real was down 0.80% on Thursday. USD/BRL closed at 3.1665.

Gold - No Selling Pressures Below 1265.

 

Today's Key Issues	Country/GMT
Oct Business Climate Indicator, exp 0,46, last 0,45	EUR/09:00
Oct Industrial Confidence, exp -1,6, last -1,7	EUR/09:00
Oct Services Confidence, exp 10, last 10	EUR/09:00
Oct F Consumer Confidence, exp -8, last -8	EUR/09:00
Oct FGV Inflation IGPM MoM, exp 0,20%, last 0,20%	BRL/10:00
Oct FGV Inflation IGPM YoY, exp 8,84%, last 10,66%	BRL/10:00
oct..28 Key Rate, exp 10,00%, last 10,00%	RUB/10:30
Sep South Africa Budget, last -16.68b	ZAR/12:00
Oct P CPI MoM, exp 0,20%, last 0,10%	EUR/12:00
Oct P CPI YoY, exp 0,80%, last 0,70%	EUR/12:00
Oct P CPI EU Harmonized MoM, exp 0,10%, last 0,00%	EUR/12:00
Oct P CPI EU Harmonized YoY, exp 0,70%, last 0,50%	EUR/12:00
3Q Employment Cost Index, exp 0,60%, last 0,60%	USD/12:30
3Q A GDP Annualized QoQ, exp 2,60%, last 1,40%	USD/12:30
3Q A Personal Consumption, exp 2,60%, last 4,30%	USD/12:30
3Q A GDP Price Index, exp 1,40%, last 2,30%	USD/12:30
3Q A Core PCE QoQ, exp 1,60%, last 1,80%	USD/12:30
Oct F U. of Mich. Sentiment, exp 88,2, last 87,9	USD/14:00
Oct F U. of Mich. Current Conditions, last 105,5	USD/14:00
Oct F U. of Mich. Expectations, last 76,6	USD/14:00
Oct F U. of Mich. 1 Yr Inflation, last 2,40%	USD/14:00
Oct F U. of Mich. 5-10 Yr Inflation, last 2,40%	USD/14:00

 

The Risk Today

Yann Quelenn

EUR/USD is now moving sideways. Strong resistance lies at 1.1058 (13/10/2016 high). Key resistance is located far away at 1.1352 (18/08/2016 high). Expected to further weaken towards support area below 1.0860. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.

GBP/USD is trading below 1.2200. The momentum seems still negative. Hourly support is given at 1.2083 (25/10/2016 low) while hourly resistance lies at 1.2329 (11/10/2016 high). Key resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to show continued weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.

USD/JPY has broken uptrend channel. The resistance was implied by the upper bound of the uptrend channel around 105. Next key resistance lies at 107.49 (21/07/2016 high) while hourly support is given at 102.81 (10/10/2016 low). Key support can be found at 100.09 (27/09/2016). We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).

USD/CHF's momentum tend to fade. The pair still lies within former resistance area between 0.9919 (07/08/2016 low) and 0.9950 (27/07/2016). However, the momentum remains bullish since September 15. Hourly support is located at 0.9733 (05/10/2016 base) then 0.9632 (26/08/2016 base low). Expected to see continued increase. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.

 

Resistance and Support:

EURUSD	GBPUSD	USDCHF	USDJPY
1.1428	1.3121	1.0328	113.8
1.1352	1.2857	1.0257	111.45
1.1058	1.2477	1.0093	107.49
1.0903	1.216	0.9936	105.39
1.0822	1.209	0.9632	102.8
1.0711	1.1841	0.9522	100.09
1.0458	1.052	0.9444	99.02