Sept 20, 2016 - New Zealand and the next challenge for its Central bank

We are heading towards the super Wednesday which will be the rate decision day for BoJ, Fed and RBNZ. About the first two there were lots of analyses and opinions but RBNZ didn`t get that much of a spot light due to lower global impact. The story is however quite interesting…

The Success story

The Kiwi had a great year so far when following the failure of a double top formation in January the NZDUSD rallied more than 15%... this would be a nice gain even for a blue chip. The economy is in great conditions with above average growth rate at 3.6%, employment close to maximums with full time employment skyrocketing while part time employment also growing steadily. The government budget was in surplus equalling 0.2% of the GDP in the fiscal year 2014/2015.

The problems

The housing market is struggling with insufficient stocks of available houses and house prices are rising 6% p.a. based on seasonally adjusted data of REINZ. The Real Estate Institute of New Zealand (REINZ) spokesperson Bryan Thomson said recently, “The underlying trends indicate that the struggle for stock is the single biggest factor driving market behaviour and price expectations across the country, as we await Spring listings“. Simply the economy seems to be too strong to cut the rate. But then why did the RBNZ the cut the benchmark rate in August.

The problems to solve are the inflation which is stubbornly low and the deficit of the Current account which is more than 3% of GDP but well compensated by capital inflows. The Core CPI is below 2% since late 2011 however since 2015 it’s in a rising trend. Actually this rising trend of inflation is the main reason some analyst are saying there is no need for further rate cut even RBNZ said they will continue with the easing. The other reason is the competitiveness of the economy due to strong NZD. One of the key areas are dairy products which are one of the key export products of the country.  With a strong currency one of the key industries of the country can get into big trouble which may have long term negative consequences on the country.

Conclusion

However the economy seems to be simply too strong to cut the rates at this point without risking an overshooting of inflation targets and further inflating the housing bubble. There are other tools from fiscal policy to support key industries which could be used. However in the current sick policy environment on global level the politicians are reluctant to act as necessary.

We strongly believe there will be no cut this time but due to the strong dairy lobby we will see further cut later this year or at the beginning of next year. For comparison please find below some macro data by country. The red highlight means long term unsustainable, the yellow means OK short/medium term and the green means long term positive.

Don´t forget to watch you risk and be consistent

Mr. TechMan

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmail.com

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Sep 18, 2016 - Bank of Japan meeting (Sep 20-21) – a comprehensive policy assessment

The decision making will be “pretty difficult” as their fellow colleagues from FOMC will be deciding on exit strategy couple of hours later the same day. Actually, we believe they already know about the FOMC decision at this point.

But let’s focus on a few facts about BoJ first:

-          Expecting a comprehensive assessment of monetary policy, its tools and effects, economic activity – positive words, not really pointing to negative effects

-          Confirming that negative rates and asset purchases helped to lower the funding costs for corporates, not caring much about banks

-          …but all of that is very questionable for banks as their profit margins got squeezed or turned negative (latest call on BoJ officials from one of biggest Japanese banks to take into account negative effects of low or negative rates). Also the pension funds and savings suffer what is not offset by rising consumption of aging nation as Japanese are. From this perspective, the Japanese companies are more worried about pension obligations than effects of borrowing costs on their business.

-          Actually the aging and heavily indebted economy is becoming less and less flexible and responsive to any policy actions to ignite the growth and inflation. Japan as a country will have to face very tough structural reforms and need to globalize the corporate sector more in the near future.

-          While looking at the asset purchases of stocks, corporate bonds, ETFs…etc., we are not sure whether BoJ, already in some cases a significant shareholder of some companies, is analysing its steps, influencing the board decisions…etc. – what is really insane just as a fact itself that central bank is a shareholder…!!! Aren’t we witnessing currently a global nationalisation…?

-          Inflation still well below 2% target with long term expectations being very weak too (don’t blame oil only)

-          Economy still not able to grow at desirable pace but some positive signs are here

-          The yield curve has started to steepen recently – a sign of markets expecting something from BoJ (for example more flexibility with bond purchases, reducing of purchase on longer end or tapering…etc.). Bear also in mind that any spike up in JPY may be short lived as higher long term yields are usually negative for JPY.

-         Opinion split between BoJ officials, as well as officials and government is becoming more visible (more negative rates vs bond purchases vs none of them).

Our expectations:

-          Overall we expect BoJ to be very bold about its decisions but still may disappoint the markets as Kuroda’s team will keep some room for a follow up action after FOMC decision. In other words they will come up with a bit more flexibility, few tweaks of QE, eligible assets (local or foreign bonds), maturities...etc. and as a reaction the USDJPY will be falling towards 100, then reaching the recent lows around 99, and if there is no action over coming weeks/months it can even move lower to 95 or so.

-          Further rate cut is possible, especially as an attempt to widen the yield spreads with US Treasuries once the JPY starts to strengthen again and also to move more from JGB purchases in order to steepen the yield curve at long end, thus giving the banks a chance to increase margins (deposits vs loans).

On the upside we see for USDJPY the resistance levels at 102.50, 103.50, 105.00 and 107.50. From technical perspective closing on weekly chart above 104.50/105.00 levels opens the sky as a limit for USDJPY.

-          Next meeting is on Oct 31-Nov 1 but the action (for example intervention) can take place even before that meeting especially, in case of significant JPY strengthening to USDJPY 100 or below level

-          Improving predictability and communication/guidance would bring lots of clarity to markets. May be they are not sure what to do or are split and that’s why they do not communicate properly (Fed officials come to my mind with this point as well)

-          As per CFTC commitments of traders report as of Sep 13, 2016 the speculators were long 57k JPY futures contracts vs 54k previous week what may tell us that the market has either doubts about BoJ actions or is not expecting the move

-          In case of a combination of no action from BoJ and Fed we may refocus ourselves on US presidential debates and elections on Nov 8, as the range bound trading will continue once the dust settles.

Good luck Champs!

Mr Hawk

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom

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Aug 22, 2016 - Jackson Hole coming, but what about the rate hike…?

Jackson Hole coming, but what about the rate hike…?

As the ongoing trust in Fed is close to zero, we may eventually see a bit of nervousness before Friday. We may spot some unwinding of the big position and abrupt moves, as the market clearly doesn’t know what to think or expect from Yellen. All of that despite pretty hawkish comments from Dudley and Williams last week, supported by Fisher over the weekend. This provides a short-term strength for USD at the moment.

So what’s the bet?

Looking at 4 rate hikes? This one is off…

Dec hike, looking like…

Oct hike, Fed hurry up before US elections…

Sep hike, well, the credibility of the Fed and its officials may increase by an inch from zero…

Questions

When we look at the history, Fed is cutting the rates when stock market is really going down. But where it is now? Printing new historical highs…, so it is the time to raise rates, right?

What about housing market? Peaking again…A time to raise rates, right?

What about USD? For some reason it is still not clearly moving higher…Why?

Economy and job market getting better, GDP growth is accelerating and with inflation getting close to Fed targets…Hiking?

Investments to recover after US elections, the effects of stronger USD to fade away…

Productivity slowdown? As Fisher said, we don’t know to measure it properly…

Slowdown in China, Brexit aftermath, debt issues in Europe, US elections risks? Worth to consider…

All of these are good questions but very likely, Yellen will not provide us with any clear signal. Has she ever?

Our take

We see two hikes this year and the first one will likely come already in Sep, so there will be some time for dust to settle before US elections. For those who see the same, the long USD, underweight or short US 10yr or 30yr Treasuries, and short silver and gold, may be the right trade. The question of regaining a bit of trust of market participants in predictability and communication ability of Fed officials will be tested again.

The second hike in Dec will be really data dependent in the light of results of US presidential elections of course.

Risks

Data, data and again data. Yellen at Jackson Hole will again point to data dependency (US NFPs are on Sep 2 while FOMC on Sep 21).

From political perspective the Brexit vote shock aftermath or US elections risks are also taken into account but at the moment, the risks related to US elections, seem to be bit ignored by bond markets. But what about the Fed?

All in all, the Jackson Hole speech may be again a non-event as it was 9 times out of last 10 speeches, apart from the one in 2010, when Bernanke announced the QE2 preparation.

Good luck Champs!

Mr Hawk

DISCLAIMER: This material was created for informational purposes only and represents the Land of Trading team’s view of the past and current economic and capital market environment. It is not an investment advice and should not be viewed that way at all, and the creators of this material cannot be held liable for any potential losses resulting from trading, where despite this disclaimer someone would consider this material as an investment advice. All rights reserved ©2016. Contact: landoftradingATgmail.com

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