Mar 20, 2019 – Wednesday

1) Japanese Yen Could Gain As Focus Grows On Creaking Inflation Target
2) Gold Prices at Risk as Cautious FOMC Stokes Global Slowdown Fears
3) Preview for March FOMC Meeting and US Dollar Price Forecast
4) Evergreen Buck Goes Down

1) Japanese Yen Could Gain As Focus Grows On Creaking Inflation Target

The Japanese Yen tends to play the role of haven in international currency markets, sought after when investors are worried about global growth but not much wanted when risk appetite runs high.

The reasons for this are clear enough. The Japanese authorities have for many years been attempting to stoke pricing power with ultra-accommodative monetary policy. This has left Japanese short interest rates at -0.1% and Yen returns extremely paltry when compared to, say, the US Dollar’s. US base rates may not be especially high by historical standards but, at 2.25-2-5%, they dwarf Japan’s.

The only reason to repatriate your Yen, then, is when you are so worried about world growth prospects that you’ll take even rock-bottom Japanese returns as the price of safety.

The problem is, though, that the Japanese authorities have not managed to stoke that pricing power. Today, after decades of loose monetary policy the Japanese annualized consumer price inflation rate stands at 0.2%. Yes, you read it correctly. That is the annualized rate.

It seems obvious that the Bank of Japan’s ‘sustained 2%’ inflation target is now unreachable. Inflation has been nowhere near that level since the end of 2014.

Officially the BoJ line is that powerful monetary easing will see that inflation target hit, but it’s hard to find many in the markets who believe that that day is coming anytime soon. And it’s very likely that doubts are growing in official circles too.

Nikkei reported last September that doubts were growing at the central bank about the target, with focus turning instead to mitigating the side effects of stimulus already applied. In November the Paris-based Organization for Economic Cooperation and Development (OECD) suggested that an inflation range might now be more appropriate for Japan than a simple target.

The Bank of Japan’s Governor Haruhiko Kuroda said in December that attempts to hit the target would be taken ‘step by step.’ This looks innocent enough on casual viewing, but it replaced earlier pledges to get there ‘as soon as possible’ and was a clear watering down of ambition.

Now comes a Bloomberg report suggesting that some at the BoJ think the target will remain elusive through this year, next year and into 2021.

It’s important to note that all of the above are merely straws in the wind. As far as anyone knows these are unrelated reports and there may be no deeper meaning behind any of them.

But the inflation target is in focus again. If these stories keep coming, speculation that it could be altered will only increase. Should they gain traction then they may well provide the Yen with the sort of domestic economic data support it now lacks, given the current clear disconnect between economic performance and monetary policy.

2) Gold Prices at Risk as Cautious FOMC Stokes Global Slowdown Fears

Benchmark commodity prices were little-changed yesterday, with traders seemingly withholding directional commitment until the much-anticipated FOMC rate decision is released. No policy changes are expected. However, a palpably dovish turn in official rhetoric over recent months implies downgrades of growth and inflation forecasts as well as the projected policy path are almost certainly in the cards.

The markets’ priced-in outlook – as reflected in Fed Funds futures – argues for no rate hikes in 2019. Bringing official projections in line with that would imply a 50bps drop from December’s assessment, which is probably too drastic of an adjustment for slower-moving central bankers to make. Even that would only ratify existing positioning however, meaning a truly market-moving dovish surprise is unlikely.

Chair Powell and company’s defensive pivot may amplify already simmering global slowdown fears however. To the extent that this stokes de-risking across financial markets, it may hurt crude oil prices alongside other cycle-sensitive assets. It may likewise put a premium on the unrivaled liquidity of the US Dollar. A somewhat counter-intuitive rise on these grounds bodes ill for perennially anti-fiat gold prices.

Gold prices still look to be tracing out a somewhat awkward Head and Shoulders topping pattern. A daily close below neckline support at 1282.11 would initially expose the 1260.80-63.76 area but broadly hint at a larger drop to near 1220 thereafter. Alternatively, a breach of resistance in the 1303.70-10.95 zone sets the stage to revisit February’s swing high at 1346.75.

3) Preview for March FOMC Meeting and US Dollar Price Forecast

The US Dollar (via the DXY Index) has fallen slightly at the start of the week despite no significant US economic data having been released. As traders await the results of the Federal Reserve’s March 19-20 FOMC meeting, traders have temporarily suspended their gaze from the latest Brexit developments or the US-China trade war talks. How long markets stay focused on the Fed, however, depends on whether or not Fed Chair Jerome Powell is able to maintain the confidence of market participants.

Maintaining the view taken at the January FOMC meeting, Fed Chair Powell has said in recent weeks that the FOMC does “not feel any hurry” to raise rates again soon. He has seemingly ‘righted the ship’ in recent weeks after a rough stretch of communication from the end of October through January.

Evidently, there has been some concern over the state of the US economy due to the US government shutdown from December 23 to January 25– the Atlanta Fed GDPNow growth tracker shows Q1’19 GDP at a mere +0.4% annualized – as well as how quickly price pressures would stabilize following the downturn in energy prices during Q4’18.

4) Evergreen Buck Goes Down

the evergreen buck slumped due to the fact that the key US bank started its two-day gathering, with many expecting the major financial institution to come up with a dovish outlook on monetary policy when the gathering concludes on Wednesday.

Assessing the purchasing potential of the American dollar in contrast with its main rivals the USD index decreased by 0.18% hitting 95.81.

With many traders arguing on an intact interest rate decision from the Fed, the major bank’s summary of economic projections along with the so-called dot plot – demonstrating projections of where every Fed Chair expects the interest rates to be at certain points in the future — are anticipated to attrack most attention.

American economic data has indicated a deceleration in surge, giving analysts grounds to suggest Fed members will probably tame their appetite for monetary policy tightening.

The Fed’s dot plot uncovered at its December gathering, indicated two rate lifts were in the pipeline for this year, although with signs of an economic deceleration, experts actually expect the number of rate lifts on the “dot plot’ of estimates will dive to only one in 2019.

Notwithstanding hopes for a dovish Fed, American government bond gains have rallied, taming losses in the evergreen buck despite both the common currency and the UK pound moving off minimums of the trading session.

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