BoJ maintains status quo, Canada CPI in focus

Market Brief

The FX markets adjust levels after highly volatile week on FOMC decision, oil drop and surprise rate actions from Russia and Switzerland. The Asian equity markets traded in green this Friday: Nikkei gained 2.39%, Hang Seng and Shanghai’s Composite recovered 1.33% and 1.67%, ASX rallied 2.45%. EUR/USD consolidated weakness at the tight range of 1.2274/98 in Asia. A week close below 1.2325 will send the MACD in the red zone. The EUR sentiment remains negative on ECB QE expectations as soon as the first quarter of 2015 and hawkish sentiment vis-à-vis the Fed policy outlook. Large option barriers trail below 1.2300 for the New York cut.

GBP/USD will likely finish within its September – December downtrend channel. The surprise retail sales 6.9% y/y (ex-autos) failed to push GBP/USD into bullish consolidation zone amid the CPI fell to 1% y/y and the unemployment deteriorated to 6%. Option barriers trail below 1.5650 /1.5700 for today expiry. EUR/GBP took a dive to October-December ascending base (0.78325). The bias is negative, option barriers are solid at 0.7850/0.7900 for today expiry. Break below the base should signal deeper sell-off.

The BoJ maintained status quo 8-1, leaving the annual monetary increase target unchanged at 80 trillion yen. The EconMin Amari said weak JPY benefits to exporters yet hurts households via high import costs. He added that the slide in oil is positive for recovery, but deflation should be avoided. At this point, we believe that markets question whether there is need for further JPY weakness. More importantly, is there any more benefit in further JPY slide? USD/JPY and JPY crosses were better bid in Tokyo. USD/JPY remained above the Ichimoku baseline (118.65) and advanced to 119.47. The bearish momentum slowed, decent option bids at 119.00 should give support before the weekend. EUR/JPY remains capped below its descending Ichi conversion line (146.92).

USD/CAD topped at the Fibonacci 123.6% projection on July-November lift (1.1670s) through this week. The cooler sell-off in oil slowed down the loonie debasing post-FOMC, however the trend and momentum indicators remain comfortably bullish on USD/CAD. Canada releases the November inflation figures today. The headline CPI is expected to ease from last month’s surprise 2.4% to 2.2% y/y, yet the core index, excluding the most volatile food and energy prices, is seen faster at 2.5% y/y (vs. 2.3% a month ago). The macro situation is very challenging for Mr. Poloz. In one hand, the smash in oil markets should harm the already fragile Canadian recovery and require a flexible BoC policy. On the other hand, a strong CPI read should push the BoC toward a less dovish tone, given that the 2% inflation target is being desecrated seriously. USD/CAD option bids trail above 1.1475 before the week’s closing bell. The sentiment remains CAD-negative.

Today’s economic calendar consists of German November PPI m/m & y/y, German January GfK Consumer Confidence Index, French December Production Outlook and Manufacturing and Business Confidence, Norway December Unemployment Rate, Italian October Industrial Sales and Orders m/m & y/y, Euro-zone October Current Account, UK November Public Finances, Italian November Wages m/m & y/y, Kansas Fed December Manufacturing Activity, Canadian November CPI m/m & y/y and October Retail Sales m/m.