Yen Higher as BoJ Turned Slightly More Optimistic, But No Follow Through Buying

Yen spikes higher after BoJ turned slightly optimistic over the country’s inflation outlook. But there is no follow through buying seen. USD/JPY is kept in middle of range of 110.18/114.17. Dollar also recovers mildly after US government reopens. But overall, the greenback is staying in near term down trend against all major currencies. In other markets, risk appetite stays strong. DOW hit another record by gaining 0.55% to 26214.60. S&P 500 and NASDAQ were even stronger, closed up 0.81% and 0.98% at record highs. 10 year yield extended recent rally by rising 0.028 to 2.665. A take on 3% handle is now having realistic possibility.

BoJ stands pat, kept economic forecasts unchanged

BoJ left monetary policies unchanged today as widely expected. The short term policy rate is held at -0.10%. And under the yield curve control framework, BoJ will continue with the JPY 80T a year asset purchase to keep 10 year JGB yield near zero. The vote was made with 8-1 vote with Goushi Kataoka dissented again. Kataoka continued to push for targeting yields on longer JGBs too. As noted in the accompanying statement, the members suggested that "inflation expectations have moved sideways recently", compared with previous reference that "inflation expectations have remained in a weakening phase".

In the quarterly outlook, BoJ pledged again to continue with "quantitative and qualitative monetary easing with yield curve control" for "as long as it is necessary" to achieve the 2% inflation target. Core CPI is projected to climb to 1.4% in fiscal 2018 and 1.8% in fiscal 2019, excluding effects of consumption tax hike. Real GDP is projected to grow 1.4% in fiscal 2018 and 0.8% in fiscal 2019. These projections are unchanged from October 2017 forecasts.

Also from Japan, all industry activity index rose 1.0% mom in November.

US government reopened through Feb 8

In the US, the Congress has finally passed the measures to reopen the government, but only through February 8. The breakthrough came after Senate Majority Leader Mitch McConnell agreed to address the demands of Democrats on the "dreamers" program. Senate Democratic Leader Chuck Schumer said afterwards that "the Republican majority now has 17 days to prevent the dreamers from being deported."

Marvin Goodfriend, a Carnegie Mellon University professor, attended a nomination hearing as Fed Governor before Senate Banking Committee. Goodfriend said that "guided by the goals of maximum sustainable employment, price stability, and financial stability, and with lessons from its past, the Federal Reserve must be alert to future challenges." And, "I intend to draw on my academic and professional experience to promote policies that would further increase transparency and accountability at the Federal Reserve." Goodfriend is President Donald Trumps’ third nomination after Jerome Powell and Randal Quarles. He is also a former Richmond Fed policy adviser.

CBI urged to stay in EU customs union

In UK, the Confederation of British Industry heavily criticized the government Brexit approach and call for staying in EU customs union. CBI director general Carolyn Fairbairn also said yesterday that "there may come a day when the opportunity to fully set independent trade policies outweighs the value of a customs union with the EU; a day when investing in fast-growing economies elsewhere eclipses the value of frictionless trade in Europe. But that day hasn’t yet arrived."

Fairbairn also called for having a clear transitional EU trade deal by April, or "firms will have no choice but to trigger their plan Bs". Also "more jobs and investment will leave our shores and future generations will pay the price."

IMF raised global growth forecasts

At its latest forecasts, the IMF raised the 2018 global growth forecast by 0.2 percentage point to 3.9%, led by acceleration in the US (GDP growth up by 0.4 percentage point to 2.7%) and Eurozone (up by 0.3 percentage point to 2.2%). While the world lender upgraded US growth because of the tax reform plan, it warned that the deal is negative to growth in the long term.

The IMF downgraded UK’s growth outlook, by -0.1 percentage point, to 1.5% for 2019, while leaving the growth forecast for this year (also at 1.5%) unchanged. The main reason is the uncertainty of Brexit negotiations and the future trade relations between the UK and the EU after the "divorce". However, this has not affected the pound. Rather, GBPUSD has rallied to a post-referendum high as French President Emmanuel Macron noted that the might be "special deal" for Britain.

Looking ahead

German ZEW economic sentiment is the main feature today. Eurozone consumer confidence, UK public sector net borrowings will also be released.

USD/JPY Daily Outlook

Daily Pivots: (S1) 110.54; (P) 110.88; (R1) 111.27; More…

Intraday bias in USD/JPY remains neutral as it continues to stay in range of 110.18/111.47. On the upside, break of 111.47 will affirm the case that correction from 114.73 is finished with three waves down to 110.18. Intraday bias should then be turned back to the upside for 113.38 resistance for confirmation. However, below 110.18 will extend the correction lower. But we’d again look for bottoming signal in next fall.

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