Japan, Chinese stocks consolidate

Forex News and Events

Japan long-term IDR’s downgraded one notch

Fitch downgraded Japan's Long-Term Foreign and Local Currency Issuer Default Ratings to A from A+ as the government said it want to cut corporate tax rates again in FY16 after a previous cut in FY15. The government is therefore betting that growth will be sustainable over the long-term and that the Yen will remain weak to boost export as a slump in corporate tax profits will hurt harder the government’s budget. The Japanese economy ended FY15 in a pretty bad shape: industrial production contracted by 3.1%m/m or -2%y/y in February and is expected to remain below zero for March (exp. -2.3%m/m or -3.4%y/y) while retail sales released this morning came in way below expectation at -9.7%y/y verse -7.5% (or -1.9%m/m verse 0.6%). Small and medium Japanese companies are gloomy about business outlook as the April Small Business Confidence Index came in below expectation at 47.4 verse 49.

The BoJ will therefore be very sensitive to any event affecting negatively growth outlook and will monitor closely inflation expectation as well. The BoJ is expected to cut growth and inflation forecast on April 30 during its Monetary Policy Meeting. We therefore think the BoJ will not wait that weak economic outlook weighs on public expectation of inflation. However, we do not expect the central bank will increase stimulus measures at Thursday meeting and will rather wait further indications in the coming weeks.

Chinese stocks retreat temporarily

We don’t predict a sustained correction in China stocks. Shanghai composite fell back marginally today as investors prepare for the FOMC meeting. Uncertainly from the Fed meeting is keeping FX implied volatility elevated. However, we anticipated a mildly dovish Fed statement which will support growing expectations that the Fed will not raise rate in 2015. With the Fed monetary policy side-lined and global central banks retaining ultra-loose policy we believe China stocks will continue their bullish trend on Thursday. The PBoC dropped the USDCNY fix by 11pips to 6.1209 while USDCNY rose to 6.22 before sharply reversing to 6.205. We expect CNY to remain resilient through this period of volatility.

Brazilian Real’s rise is accelerating

USD/BRL’s depreciation accelerates as the pair closed under the 50-dma at the beginning of last week – last time was on January 20. The dollar fell more than 12% against the real since the peak of March 20 where the exchange rate reached 3.3148 (a level last seen in April 2003) amid S&P affirmed Brazil’s investment grade rating at BBB-. Brazil’s March unemployment rate is due this afternoon and is expected to come in at 6.1% (prior 5.9%). It would be the third consecutive monthly increase in unemployment rate. UDS/BRL is currently consolidating around 2.91 as traders await the outcome of the FOMC tomorrow.

USD/BRL is falling sharply