Yen Jumps as BoJ Lowers Long Dated JGB Purchase, Aussie Rebounds on Housing Data

Yen strengthens against all major currencies in Asian session on news that BoJ lowers its long-dated JGB purchases. Strength in Yen is followed by Aussie, which is lifted by strong housing data. On the other hand, Dollar and Euro are both trading weakly. Comments from Fed officials overnight gave no extra confidence to the markets that Fed would hike three more times this year, not to mention four. Meanwhile, Euro stays soft as recent rally lost steam.

BoJ cut 10-25 years JGB purchase by JPY 10b

Yen surges broadly today as data showed BoJ has cut its long-dated JGB purchases in market operations. That’s seen as a sign by many of BoJ is finally moving towards stimulus exit. Today, BoJ offered to buy JPY 190b of JGBs with 10 to 25 years maturity. That’s JPY 10b lower from the prior tender on December 28. Besides, BoJ also lower the offer on 25 to 40 years maturity JGBs by JPY 10b to JPY 90b. Nonetheless, it should be emphasized that it’s far still early for BoJ to start stimulus exit as inflation remains way off target.

Also, it’s still uncertain whether BoJ Governor Haruhiko Kuroda’s term would be renewed this year. Prime Minister Shinzo Abe said during the weekend that "Gov. Kuroda has met my expectations with job availability at a 43-year high," and "I want him to keep up his efforts". But Abe also noted that "I haven’t made up my mind" on who’s going to lead BoJ after Kuroda’s term expires in April.

Released from Japan, labor cash earnings rose 0.9% yoy in November, above expectation of 0.6% yoy.

Aussie rebounds on strong building approvals

Australian dollar rebounds notably today following strong housing data. Building approvals rose 11.7% mom in November, versus consensus of -1.0% mom fall. AUD/USD dipped briefly yesterday after the government forecasts iron ore price to drop 20% this year. While loss was very limited, it should be noted that upside momentum in AUD/USD has been diminishing for a while. Hence, we’re not expecting a 0.7896 near term resistance on the next move. Aussie will look into retail sales and China data later in the week.

North and South Korea delegates meet in the "Peace House"

North and South Korea holds a rare high-level talks in the so-called Peace House in Panmunjom, a village in the Demilitarized Zone between the two countries. North Korea said that it would send athletes and a high-level delegation to the Winter Olympics in South Korea in February. The delegation will include athletes and supporters, amongst others. The North also expressed the willingness to resolve inter-Korea issues through dialogues. On the other hand, delegates from the South wants both nations to march together at the Games and proposed reunions of families during the upcoming Lunar New Year.

More bet on BoC hike this month

Hopes for a BOC rate hike, by 25 bps, at next week’s meeting has surged to 85%, thanks to the Business Outlook and Senior Loan Office surveys for 4Q17 and the strong job market data which has already sent the loonie to a 3 months’ higher last week. Canadian government bond prices generally weakened across the yield curve, sending 2-year yields lower 1.784% and 10-year yields down to 2.159%. The Business Outlook survey revealed that a net 56% of firms admitted "some" or "significant" difficulty in meeting additional demand. This marks the highest reading for a decade. Meanwhile, firms’ capex and hiring intentions strengthened in 4Q17. However, inflation expectations remained subdued, a net 56% of respondents expecting inflation to stay at or below 2% over the next 2 years, compared with 59% in the previous survey.

Atlanta Fed Bostic: May not need three hikes per year

Atlanta Fed President Raphael Bostic said that he agrees to Fed’s "slow removal" of monetary policy accommodations. But he emphasized "I would caution that that doesn’t necessarily mean as many as three of four moves per year." He pointed to the surveys should that "individuals may not be completely convinced" on Fed’s commitment or ability to reach the 2% inflation target. And "this possibility is one factor that might argue for being somewhat more patient in raising rates." Bedsides, he noted that the so called "neutral" rate could have dropped to "close to 2%". And Fed only needs to hike two or three more times before monetary policy is no longer considered "loose".

On the other hand, San Francisco Fed President John Williams said Fed should hike three times this year. He noted that "we’re in a pretty good situation: the economy is doing great, everyone expects us to raise rates gradually … and if the data change we can respond to that." He expressed that "I’m not worried about inflation suddenly taking off," and "something like three rate hikes makes sense to me".

Looking ahead

Swiss unemployment rate, foreign currency reserves and retail sales will be featured in European session. Eurozone will release unemployment rate, German industrial production and trade balance. Later in the data, Canada will release housing starts.

USD/JPY Daily Outlook

Daily Pivots: (S1) 112.85; (P) 113.11; (R1) 113.35; More…

USD/JPY drops sharply after hitting 113.38. But after all, it’s staying in range of 112.02/113.74. Intraday bias remains neutral at this point. Also, outlook remains cautiously bullish as long as 112.02 holds and further rise is in favor. Break of 113.74 will resume the rebound from 110.83 and target 114.73 key resistance. Decisive break there will carry larger bullish implications. However, break of 112.02 will likely extend the corrective pattern from 114.73 with another leg through 110.83 support.

In the bigger picture, we’re holding on to the view that correction from 118.65 is completed at 107.31. And medium term rise from 98.97 (2016 low) is going to resume soon. Sustained break of 114.73 should affirm our view and send USD/JPY through 118.65. However, break of 107.31 will dampen this view and extend the medium term fall back to 98.97 low.

Economic Indicators Update