Commodity Currencies Extend Gains, Bank of Japan Keeps Policy Unchanged

• We expect the BoJ to expand the size of its stimulus at the end of the month amid mounting evidence of a slowdown
• The debt-to-GDP ratio will increase as long as confidence in the BoJ stands
• USD/JPY continues to trade range-bound between 118.61 and 121.75 as investors prefer to sit on the sidelines, waiting for BoJ’s semi-annual policy meeting
• Commodity currencies are still on the rise, driven by recent strong gains in commodity prices
• Kiwi will need a fresh boost to break the strong resistance lying at 0.6709 although we see limited upside potential as the underlying fundamentals remain weak in New Zealand
• AUD/USD is climbing quickly toward the next key level standing at 0.7280 in a post double-bottom rally
• EUR/CHF showed a muted response to better-than-expected data as traders remain reluctant to build long EUR/CHF positions against the backdrop of expectations of an increase in the ECB’s asset purchase programme

Overnight, the BoJ held its monthly meeting and decided, as expected, to keep its qualitative and quantitative programme unchanged at ¥80tn per year. However, we do expect the Bank of Japan will expand the size of its stimulus at the end of the month amid mounting evidence of a slowdown. USD/JPY continues to trade range-bound between 118.61 and 121.75 as investors prefer to sit on the sidelines, waiting for the BoJ semi-annual policy meeting on October 30.

***YannQuelenn, Market Analyst: “Speculations have finally ended. At the BoJ Monetary Policy Briefing in Tokyo, Governor Kuroda announced that the Quantitative and Qualitative easing program is to remain unchanged. He even declared that no further easing was needed. On the contrary, traders expected a rise in the annual pace of the monetary base. It finally holds, for the time being, at yen 80 trillion a year.  Even the difficult objective of a 2% inflation target by the end of 2016 has been confirmed. Governor Kuroda used optimism in the face of adversity by stating that there is actually no way that this inflation target won’t be reached.

From our perspective, all that Kuroda has done is gained (limited) time. The BoJ semi-annual outlook report, which is expected on October 30th, will provide an update of its outlook for inflation and economic growth. We expect to see some changes as the fundamentals remain weak. Q2 GDP printed at -1.2%y/y, Industrial Production fell in August by -0.5%m/m, Retail Sales came in flat and last but not least, the CPI is taking too long to take off. As a result, the Bank of Japan will be forced to react, above all to preserve its credibility. In other words, mountains of money have flooded Japan since 2008 and revenues are still nothing compared to what has been paid for.

Japan is in a difficult situation. There is definitely no sign of relief on the horizon. The debt-to-GDP ratio will just continue to surge as long as the confidence in the BoJ stands. As it has been heard in the market “The BoJ has certainly lost confidence in its own confidence!”***

In the equity market, most Asian regional markets extended gains overnight after Wall Street closed roughly flat as investors took a breather from the equity rally. In Japan, the Nikkei climbed 0.94%, while the broader Topix index surged 1.17%. In Hong Kong, the Hang Seng rose 1.49%. In mainland China, stock markets are still closed for the Golden Week public holiday. South Korea’s Kospi is up 0.76%, in Singapore stocks are up 1.45%, Taiwanese’s Taiex climbed 1.20%, Australia’s S&P/ASX edged up 0.60% while in New Zealand the S&P/NZX fell -0.32%.

In the FX market, commodity currencies are still on the rise, driven by recent strong gains in commodity prices. Since the beginning of the month, WTI surged more than 10%, gold climbed 3.60% to 1,150, silver rose almost 11%, while palladium and platinum are up 9% and 4.30%, respectively. NZD/USD is leading the pack, adding 2% over the last 24hours, back above the 0.66 threshold. However, the Kiwi will need a fresh boost to break the strong resistance lying at 0.6709 (high from August 21st) to the upside. We however see limited upside potential as the underlying fundamentals remain weak in New Zealand. AUD/USD is climbing quickly toward the next key level standing at 0.7280 (high from September 18th) in a post double-bottom rally.

Yesterday, data showed a slight deceleration of disinflation in Switzerland. Headline CPI remained stable in September compared to the previous month, printing at -1.4%y/y, versus -1.5% expected. The volatile components such as energy, fuel, fresh food and seasonal products continued to weigh heavily on price levels as the core inflation gauge came in substantially higher at -0.7%y/y. On a month-over-month basis, headline CPI increased by +0.1%m/m while the core gauge rose 0.2%. EUR/CHF showed a muted response to better-than-expected data as traders remain reluctant to build long EUR/CHF positions against the backdrop of expectations of an increase in the ECB’s asset purchase programme.

In Europe this morning, futures are mostly trading in positive territory. The DAX is up 1.20%, the CAC 0.98%, the SMI 0.41%, the Euro Stoxx 600 +0.87%, while the Footsie fell -0.07%. WTI climbed 2.06%, gold +0.31% and silver 0.47%.

Today traders will be watching the trade balance from France; foreign currency reserves from Switzerland; industrial output from Spain; industrial production from Norway; manufacturing and industrial production from the UK; MBA mortgage application from the US; inflation report from Brazil.

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