A positive shift in risk in Asia; BOJ adjusts forecasts

There was slight shift in risk appetite in the Asian session amid competing forces of a greater possibility of an end to the government shutdown, and concerns about global growth and difficulties surrounding making progress in the US-China trade talks. Though there was no specific headline or data to cause the turnaround, the gains were broad-based.

Technology stocks led the way for a sea of green across Asian bourses. Japanese shares advanced 1.0% while China and Hong Kong followed with gains of 0.78% and 0.77% respectively. Risk currencies were better bid, with AUD/USD climbing 0.17% to 0.7134 and the yen weakening 0.34% to 109.75 per US dollar.

USD/JPY Hourly Chart

Source: OANDA fxTrade

Bank of Japan maintains policy, cuts forecasts

As expected, the Bank of Japan announced no change to benchmark rates, nor to its asset purchasing program and left the forward guidance policy rates unchanged. In its quarterly outlook for economic activity and prices, it cut the 2018/19 GDP growth forecast to 0.9% from 1.4% but raised 2019/20 and 2020/21 growth to 0.9% and 1.0%, respectively. There were cuts to CPI forecasts across the board, with the 2018/19 outlook trimmed to 0.8% from 0.9%.

USD/JPY showed little reaction to the announcement, climbing just 10 ticks to 109.75.

China likely to keep investments in US Treasuries

As the trade war drags on, conspiracy theorists have been monitoring China holdings of US treasuries to see if that asset class was being considered as another weapon in China’s arsenal. Fang Xinghai, vice chairman of the China Securities Regulatory Commission, said yesterday at the World Economic Forum in Davos that he doesn’t think China will in any way reduce its investment in US Treasuries. China is America’s largest creditor with holdings of more than $1.1 trillion of US Treasuries.

China’s holdings of US Treasuries

Source: Bloomberg

From the above chart, we can see that China’s holdings have been in gradual decline since the second half of 2017 but, given the flows we have seen in the past five years, there doesn’t appear to be anything sinister in this. They are nowhere near the lows seen in 2016, but well off the peak above $1.3 trillion seen in 2013.

US shutdown not to impact jobs data

The US Bureau of Labor Statistics has announced that furloughed government workers will be counted as still employed in the January payrolls data. There were concerns that the inclusion of non-working employees would cause a blowout in the headline numbers and cause a huge distortion. The January non-farm payrolls number are due on Friday February 1, with the latest Bloomberg survey suggesting 163,000 jobs were added in the month, a marked slowdown from December’s 312,000.

Europe confidence to sag

Consumer confidence in Europe is seen sliding to -6.5 in January from -6.2 in December. The risk could be an upward surprise given that yesterday’s ZEW survey showed a very slight improvement to -20.9 from -21, though the German reading was much better than forecast.

On the US calendar, there is nothing major due, just mortgage application, the Redbook index and Richmond Fed manufacturing index for January.