The new challenges facing the Sino-American trade talks following strong anti-government protests in Chile in Santiago casts doubt on the timing of the interim trade agreement that was originally scheduled to be signed between 16 and 17 November 2019 by both US and Chinese Presidents amid the Asia-Pacific Economic Cooperation summit. Meanwhile, the latest Bank of Japan monetary policy decision does not surprise much as it maintains short- and long-term rates unchanged despite growing contraction of manufacturing and service activities. In this context, demand for JPY is expected to remain high, as the BoJ’s ability to convince market participants that further easing is conceivable appears limited, while yesterday’s Fed decision to cut interest rates strengthens the trend.
The change in BoJ forward guidance from “maintaining interest rates unchanged at least until spring 2020” to “expects short- and long-term rates to stay at current or lower levels as long as needed to pay close attention to the possibility that momentum for achieving price stability target is lost” increases speculations that further easing is on its way. However, given that the central bank considers that the chance of momentum missing the 2% target remains unchanged and that its quarterly assessment of the outlook confirms that the Japanese economy should grow “moderately” regardless of declining exports, production and business climate, the question of further monetary easing is rather questionable. The release of both manufacturing and services PMI last week pointing at 48.5 (prior: 48.9) and 50.3 (prior: 52.8) respectively as well as factory activity declining at the fastest pace since end-2012 due to disrupting Typhoon Hagibis floods in northern Japan as well as the tax hike in 1 October should weigh on economic growth. The service sector is showing signs of weakness, affected by growing weakness of the manufacturing sector, which reinforces the case of a technical recession in 4Q 2019.
