Overnight, the Bank of Japan released the summary of opinions from its July policy meeting. The summary is released ahead of the minutes, and outlines the individual views of BoJ policymakers. It was very interesting to see that some officials expressed a desire to wind down their ultra-loose stimulus program somewhat. One opinion was that the Bank should reduce its annual purchases of JGBs to 45 trillion JPY, from 80 trillion currently. Another indicated the BoJ should place more emphasis on financial stability and thus, it should abolish yield-curve control altogether. Finally, a third view was that the Bank’s target level of 10-year JGB yields of ‘around zero percent’ should not be interpreted too strictly, implying officials should be more tolerant of yields rising a bit higher than 0%.
The yen did not really react to these points, perhaps because market participants were not at all convinced the Bank will actually reduce its stimulus anytime soon. Even though we hold the same view given very subdued inflation, we will monitor incoming comments from BoJ officials very carefully. Any further signals in the foreseeable future that the ‘hawkish’ camp among the BoJ may be growing larger, could prove positive for the yen.
EUR/JPY traded lower yesterday after it hit resistance slightly below 130.70 (R1), the upper bound of the sideways range that has been containing the price action since the 6th of July. Given that the rate remains within that range, we maintain the view that the short-term outlook is flat for now. Having said that, given that yesterday’s slide started after the pair tested the upper bound of the sideways path, it could continue lower for a while. Now, the pair is testing the 129.50 (S1) support line, where a decisive dip could open the way towards the lower bound of the range, at 128.60 (S2). Zooming out to the longer-term timeframes, we see that EUR/JPY is still trading above the prior downside resistance line drawn from the peaks of June 2015. As such, although the short-term path is to the sideways, we still consider the broader one to be positive.
Dollar rebounds somewhat ahead of GDP data
The US dollar recovered somewhat yesterday, ahead of today’s 1st estimate of GDP for Q2. The forecast is for US economic growth to have accelerated notably, something supported by the Atlanta Fed GDPNow model. We believe these data will be closely watched, as they may prove critical for market expectations regarding the timing of the next Fed rate hike.
If growth regains momentum as anticipated, that would confirm the Fed’s view that the slowdown in Q1 was only transitory, and is likely to increase speculation regarding another rate hike this year. Something like that could help the dollar recover some more of its latest losses. That said though, even in that case we think that the currency’s short-term outlook could remain negative. We believe that a strong rebound in inflation is needed before rate-hike expectations rise materially and help the dollar reverse its latest downtrend.
USD/CAD traded higher yesterday after it hit support at 1.2415 (S2) and then, it emerged above the 1.2525 (S1) line. The price structure still suggests a downtrend but for now, we see the likelihood for yesterday’s rebound to continue a bit more. Accelerating US GDP combined with a flat growth rate in Canada, later in the day, could prove the trigger for the continuation of yesterday’s corrective wave. A break above 1.2615 (R1) would confirm the case and may pave the way for extensions towards the next resistance of 1.2700 (R2).
As for the rest of today’s highlights:
During the European morning, Germany’s preliminary CPI data for July will be in focus. The forecast is for the nation’s inflation rate to have ticked down. Even though such a decline could reverse some of the euro’s latest gains, given that Germany does not report a core CPI rate, we believe investors will focus primarily on Eurozone’s core CPI print due out Monday in order to gauge when and how the ECB may act next. From Sweden, we get GDP data for Q2 and expectations are for growth to have accelerated notably from the previous quarter, which could support SEK. We also get the nation’s retail sales for June.
From Canada, as we already noted, we get GDP data for May and expectations are for an unchanged rate of growth. If that is indeed the case, the reaction in CAD may be limited.
We have only one speaker on the agenda: Minneapolis Fed President Neel Kashkari.
EUR/JPY
Support: 129.50 (S1), 128.60 (S2), 128.00 (S3)
Resistance: 130.70 (R1), 131.60 (R2), 132.20 (R3)
USD/CAD
Support: 1.2525 (S1), 1.2415 (S2), 1.2300 (S3)
Resistance: 1.2615 (R1), 1.2700 (R2), 1.2770 (R3)
