Helicopter Money Is Flying Away
Swissquote Bank Ltd | Jul 22, 2016 06:29AM ET
BoJ’s Kuroda rules out helicopter money (by Yann Quelenn)
The yen strengthened yesterday on comments by BoJ Governor Kuroda that helicopter money is not on the agenda. Japan’s constitution in fact prevents the central bank from using such stimulus. In any case no one is fully aware as to what exact form such a measure would take. Would it involve the issuing of perpetual bonds or even the distribution of actual cash to Japanese citizens?
Despite financial market disappointment, the Nikkei has not suffered from these comments. We believe that whatever officials are saying, markets remain confident that further stimulus will be added. In other words, if it is not helicopter money, it will be something else. The fact remains that Japan is running out of options and will be obliged to, at least experiment with this monetary tool. Quantitative easing has failed and is now reaching its limit. The next logical step to stimulate the economy is helicopter money. Japan needs inflation, at least to kill its massive debt. It seems contradictory to be reluctant to use this new tool knowing that massive stimulus was pumped into the economy over the course of the past decade with no decent results to show for it.
Until the next steps are clarified, Japan will of course continue to stimulate its economy. We expect further easing at the next meeting to be held at the end of this month. The government should announce that a yen 20 trillion (around $180 billion) fiscal stimulus package will be implemented. The huge current monetary stimulus of yen 80 trillion stimulus has not supported a pick up in inflation - in fact, inflation forecasts are now skewed to the downside. As a result, Japan recently slashed its projections on the belief that consumer inflation will not go higher than 0.4% for fiscal 2017. It seems that the same old saga continues for Japan. Why expect different results when the method does not change?
Post-Brexit read concerning (by Peter Rosenstreich)
UK PMI’s declined across the board indicating a significant post-Brexit and weakening signaling a potential economic contraction. UK flash PMIs manufacturing, service and composite declined to 49.1, 47.4 and 47.7 respectively (from 52.1, 52.3, 52.4 prior read). This was one of the sharpest drops in UK PMI history. This concerning read comes on the back of yesterday’s soft retail sales, which dropped -0.9% m/m on both core and headline numbers driven by pre-vote concerns and poor weather. Should the economic data continued to deteriorate expectations for a more dovish BoE in August will weigh on GBP. However, weakness in sterling could drive inflation expectations past the BoE target, and keeping the central bank sidelines. Yet in our view, inflation evolution, is a low probably scenario. We remain bearish on GBP/USD, with upside capped by 1.3500, targeting Brexit reaction lows at 1.2798.
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USD/CAD - Monitoring Resistance At 1.3144.
Yann Quelenn
EUR/USD is trading mixed around 1.1000. Hourly support lies at 1.0913 (06/07/2016 low) while hourly resistance is located at 1.1186 (05/07/2016 high). Stronger resistance is given at 1.1479 (06/05/2016 high). Sharp moves do not have to be ruled out as there are still a lot of uncertainties on asset pricing in the market. Expected to show continued weakness. In the longer term, the technical structure favours a very long-term bearish bias 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 higher. Uncertainties are still important on the market, we absolutely do not rule out further increasing volatility. Bullish pressures seems to fade. Expected to break lower symmetrical triangle and to target support at 1.2798 (06/07/2016 low). Resistance at 1.3534 (29/06/2016 high) looks far. The long-term technical pattern is negative and favours a further decline as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200-day moving average). Key support at 1.3503 (23/01/2009 low) has been broken and the road is wide open for further decline.
USD/JPY has weakened strongly. Hourly supports are located at 105.42 (intraday low) and at 103.91 (13/07/2016 low). Resistance is located at 107.90 (07/06/2016 high). Expected to further consolidate. We favour 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 is bullish. The buying pressures seem to prevent the pair to go lower towards hourly support at 0.9764 (14/07/2016 high). Hourly resistance is given at 0.9907 (21/07/2016 high). Expected to continue pushing higher. 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 a long term bullish bias since last December.
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