US dollar leads the gains, more easing from BoJ?

Summary:

• US dollar gains against its all G10 peers before trade negotiations in Washington kicking off today

• RBA’s minutes confirmed concerns over the consumption outlook

• BoJ’s Haruhiko Kuroda signalled the bank could mull easing policy further if needed

Trade talks move to Washington

The US dollar is by far the strongest major currency in the G10 basket this morning as investors are awaiting the beginning of another round of trade negotiations in Washington. The White House confirmed that further talks between the US and China would kick off on Tuesday. These talks are to be attended by Lighthizer, Mnuchin, Ross, Kudlow, Navarro. On the other hand, China’s Vice Premier Liu He is expected to arrive in the US capital on February 21. Sarah Sanders added overnight that trade talks would focus on “needed structural changes in China that affected trade” as well as China’s pledge to purchase “a substantial amount of goods and services from the US”. Let us remind that we have yet to receive any official confirmation or denial when it comes to a March 1 deadline postponement. If no such a step is taken by March 1 and both sides fail to reach a binding agreement on trade then further escalation of the ongoing trade tussle is on the cards. Under such circumstances the US could lift its 10% tariff rate to 25% while China would retaliate mainly by devaluing its currency. One needs to add that funding costs of offshore yuan’s shorts are extremely low with the CNH 12-month forward points hovering around zero.

As per our analyses following the latest Fed’s meeting the US dollar has rebounded since then. From a technical viewpoint one may expect the greenback to climb 97.5 or so before falling again. Source: xStation5

RBA and BoJ in the spotlight

Over Asian trading hours we were offered two important events from Australia and Japan. According to the RBA’s minutes consumption is a key source of uncertainty as households are affected by falling property prices, weak income growth and high debt. The bank signalled that while the economy was weathering the latest property slump, consumer spending could be weaker if prices kept falling. The account confirmed no a strong case for any near-term rate movements either up or down with probabilities around these scenarios being more evenly balanced than before. The bank noted that the notable drop in home loan approvals by banks was due to weaker demand and tighter credit conditions. The document stressed that trade tensions were a “material risk” to the global outlook.

In turn, the even more bearish stance was presented by Haruhiko Kuroda, the Bank of Japan Governor. He said that the BoJ would mull easing policy further if currency moves hurt the economy, prices and threatened to achieve its price goal. Among options being in the hands of the Bank of Japan are lowering bond yields and increasing asset purchases. This sentence sounds ridiculously especially the second part of it given the fact that the BoJ has already bought assets under its QQE worth 71% of GDP, roughly three times more than the entire ECB’s asset purchase programme. The Japanese central bank has been struggling to revive price growth in the economy for years. As a result, it has bought a huge amount of Japanese JGBs and ETFs creating a significant problem how to unwind its balance sheet without distorting financial markets. While the yen strengthened roughly 6% against the US dollar at the turn of the year, it has given back around two thirds of this appreciation which could ease concerns among BoJ policymakers to some extent.

The USDJPY has again approached its important resistance placed at around 111. The pair failed to break this line last week drawing the bearish engulfing pattern. Source: xStation5

In the other news:

• Donald Trump informed that he would seek a peaceful change in Venezuela signalling that all options were on the table though

• Japan’s economy minister Motegi said that CAPEX was on a rising trend overall but some risks to the economic outlook were visible due to a China’s slowdown