RBNZ Hold Less Dovish
As was widely expected the Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at 1.00%. The press conference seemed slightly less dovish then past meetings. The language introduced conditionality for providing further easing. The MPC has created more flexibly for the next meeting yet giving the macro environments we forecast another 25bp cut in November. The global economic outlook has become more uncertain while the broader trend of central banks is for easing, will force RBNZ to react to potential NZD strength (driven by yields spread widening). MPC acknowledges that slowing global growth is the key risk to domestic outlook (Q2 GDP growth slowed to 2%) but believes monetary and fiscal stimulus will support the weakness. We are not going out on a limb on this call as the market is pricing in 80% probability of a 25bp cut at the November policy meeting. The 20% uncertainty is based on Governor Orr statement following the 50bp cut in August that unconventional measures such as quantitative easing were not out of the questions. Perhaps easing will come from another direction, which is a growing trend globally. NZDUSD continues to send bearish signals despite recovery bounce, as high beta currencies rallied. A broader USD setback would be needed as resistance at 0.6364 likely to restrict bullish moves for now.
BoJ easing becomes clearer
Things are becoming a little clearer In Japan. Not only does the release of August inflation data pointing to a slowdown in momentum, but the release of the Bank of Japan Minutes from July monetary policy meeting also confirm that further easing should be expected starting from October, with a few mechanisms at its disposal. Additionally, the postponement of a formal signed trade deal by both the US and Japan, currently under legal review, should maintain uncertainties high as the economy continues to face downward pressures. While details of the deal should be disclosed during the US – Japan summit at the UN General Assembly today, investors will be carefully looking at the concluding joint statement and whether Washington is willing to sign a written consent that pledges not to introduce tariffs on Japanese vehicles and auto parts nor quota. In this circumstance, the BoJ is likely to wait for the latter in order to implement a thorough economic assessment and ultimately decide on additional stimulus.
In its July policy minutes, the BoJ confirms that it is ready to ease further in order to preempt risks that would put negative pressures on Japan’s inflation target of 2% while it is considering the use of four policy tools in order to achieve its goals, including: a deepening into negative rates, a cut in 10-year yield target, an increase of asset purchases and a rise of money printing. Yet the options appears rather limited to support sustainable easing. Furthermore, the release of August headline and core inflation printed at 0.30% (prior: 0.50%) and 0.50% (prior: 0.60%) seems to confirm that a loss in momentum is confirmed, suggesting that additional easing should occur soon. In New York, Japanese Foreign Minister Toshimitsu Motegi still hopes that the United States will deliver a promise on tariff threats to the automotive sector, although a “sunset clause” consisting of a withdrawal from the trade agreement associated with potential US taxes on Japanese auto should be included in the next signed pact. Despite the limited amount of information related to the deal, Japan should lower existing 38.50% tariffs on US beef imports in stages to 9%, certainly at better conditions than in the multilateral Trans-Pacific Partnership terms.
Currently trading at 107.32, USD/JPY is expected to head along 107.40 short-term.
