Heading into BoJ meeting short JPY
While other major central banks have shifted bias toward tighten we don’t anticipate that the BoJ will follow. Despite political pressure and questions over the effectiveness of unorthodox policy, the BoJ should reiterated its currently monetary policy strategy at its two-day monetary policy meeting. Japan remains far from its inflation target of 2% and is likely to lower its CPI forecast for 17-2018, therefore immediate pressure to change approach is lower than other nations. However, the BoJ has already shifting its focus from JGB purchases, already slowing from ¥80trn per year as member recognizing reaching quantitative limits, to yield curve control. While this strategy is likely to have a less direct effect on domestic inflation (although balance sheet expansion in Japan failed to impress), yields curve management enable BoJ to widen interest rate spread and easily influence the highly interest rate sensitive JPY. BoJ comments should be focused on their ability to control the curve including but not limited to pinning the 10yr JGB yields at 0%.
Markets might be discussing potential of Kuroda’s exiting from its ultra-accommodative policy we won’t see any hints at this meeting. Interestingly to policy board members that consistently resisted Kuroda expansionist policy were Takahide Kiuchi and Takehiro Sato are both leaving after this monetary policy meeting.
With the Fed preparing to shrink its balance sheet and the ECB expected to contemplate asset purchase tapering, both subtle ways of tightening. Yields curves in US and European should steepen further. We are slightly optimistic that the Fed will hike rates by 25bp in Dec, yet markets in the last weeks have backed away from this hawkish view. Only 40bp are pricing in to the Fed Fund rate down from 55bp only a week ago, while US 10yr yields dropped 13bp to 2.26%. A repricing of tighter rates in the US should pushed USDJPY back towards 114. BoJ steadfast in their dovish ways while the Fed and ECB marching toward the exit should reverse current JPY strength. We would reload long USDJPY at 111.80/90 level for a mid-term move towards 114.49.
Russia: Unemployment declines but the economic situation looks mixed
Since the 2008 crisis, unemployment rate is declining and the data that will be released today will approach 5%. The metric is expected to print lower at 5.1% versus 5.2% a month earlier.
The jobless rate is then declining but the proportion of unemployed person having higher education is growing. Yet, the ruble collapse in 2014 has created strong difficulties for companies to hire those skilled workers. On top of that it is clear that there are now more people with higher education than 10 years ago. As a result the proportion is naturally growing.
Meanwhile, real disposable income is falling for the 4th consecutive month (-0.4% in June). On the other hand, retail sales have grown 1.1% y/y in June after the positive increase of 0.1% y/y in May. However, that was at least three years that the annualized retail sales growth was negative. Inflation have increased by 4.4% y/y in June. It is the highest rate since February.
The Russia key rate has been lowered at 9%. The differential with inflation is still important and we should see the CBR tightening its monetary policy at a slow pace as growth remains weak. The last GDP data, the Q1 has shown a positive print, even though weak, at 0.5%.
We then believe that the ruble is set to appreciate but the appreciation should remain limited due to the CBR intervention. We target 56 before year-end.
