BoJ Meeting: A More Upbeat Tone?

BoJ meeting: A more upbeat tone?

• During the Asian morning Tuesday, the Bank of Japan will announce its rate decision and the forecast is for no change in policy. We share that view, while we see the case for the Bank to appear more optimistic with regards to the Japanese economy. Indeed, developments since the latest policy gathering have been encouraging, particularly on the inflation front. Both the headline and the core CPI rates rose notably in August and remained unchanged in September, perhaps a preliminary sign that the Bank’s QQE with yield-curve control framework is finally producing the desired effects. Meanwhile, the BoJ’s Tankan survey for Q3 showed continued improvement in the morale of Japanese businesses. In case the Bank signals its satisfaction with these developments as we expect, JPY could gain somewhat.
• USD/JPY traded lower on Friday, after it hit again resistance at the important barrier of 114.30 (R1). Nevertheless, the slide was stopped near the 113.60 (S1) support. The 114.30 (R1) hurdle is the upper bound of the wide sideways range that has been containing the price action since the 15th of March. The fact that the rate was rejected twice recently from near that zone makes us believe that the pair may continue trading lower for a while. An optimistic BoJ tonight may be the trigger for further slide. A clear dip below 113.60 (S1) could initially aim for the 113.25 (S2) support, where another break may set the stage for more bearish extensions, perhaps towards the 112.25 (S3) zone.

Oil spikes up on deal-related OPEC remarks

• Oil prices rose on Friday, after OPEC’s Secretary General Berkindo said that recent comments from the Saudi Arabian and Russian leaders clear the fog on the way to Vienna on November 30. The cartel’s top official was referring to remarks from the Saudi Crown Prince that he is in favor of extending the current agreement for 9 months, something for which Russian President Vladimir Putin signaled his support earlier this month. Despite this surge in prices though, we are still hesitant to call for further rally in oil. Given all the optimistic rhetoric around the upcoming OPEC gathering, we think that most of the “good news” may be priced in already, implying there is now a risk of a sell-the-fact reaction in oil.
• WTI surged on Friday, breaking above the resistance (now turned into support) of 53.00 (S1) to stop at 54.30 (R1). The move confirmed a forthcoming higher high on the 4-hour chart and thus, it keeps the short-term outlook positive. Although a setback may be looming given that the latest rally appears overextended, the bulls may take charge again soon and perhaps drive the battle above 54.30 (R1). Something like that is possible to pave the way for the all-important territory of 55.30 (R2). Having said that though, we are still hesitant to call for the establishment of a long-term healthy uptrend. The price continues to trade within the sideways range between 51.50 and 55.30. This is the range where we believe US shale producers are attracted to increase production, thereby keeping any short-term gains in oil prices limited.

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Today’s highlights:

• In Germany, the preliminary CPI for October will be in focus and the forecast is for the rate to tick down. In our view, the risks surrounding that forecast may be tilted to the upside, given that Germany’s preliminary Markit composite PMI for the month showed prices charged rising at one of the steepest rates since mid-2011. A positive surprise in the nation’s CPI rate could spark speculation for a similar reaction in Eurozone’s overall print and thereby, help EUR recover some of its recent losses.
• From the US, we will get the personal income and spending data for September. The forecast is for both income and spending to have accelerated on a monthly basis, something supported by similar reactions in the average hourly earnings and retail sales prints for the month. Such encouraging figures would likely be pleasant news for FOMC policymakers, and could support the dollar a little.

As for the rest of the week:

• On Tuesday, besides the BoJ decision, Eurozone’s preliminary CPIs for October will be released. On Wednesday, the FOMC policy gathering will be in focus. The Committee is widely expected to keep rates unchanged. Given this is one of the “smaller meetings” with no updated forecasts or a press conference, markets will likely concentrate on any changes to the accompanying statement. In terms of economic data, we will get the US ADP employment change and the ISM manufacturing PMI, both for October. On Thursday, the Bank of England is expected to raise interest rates. Given that this is almost fully priced in by now, focus may be primarily on any signals regarding the pace of future hikes. Finally on Friday, the US employment report for October will take center stage.

USD/JPY