The Week Ahead – Shorting the Yen

The Week Ahead – Shorting the Yen

Previous week: 14 July 2017 – 18 July 2017

RBA cash rate, Monetary policy meeting minutes—9:30am 15 August 2017

The Reserve Bank of Australia kept interest unchanged as expected.

Main Points:

Domestic Economic Conditions:

  • June quarter inflation data had been in line with the Bank’s expectations and provided further confirmation that inflation had increased since 2016. Underlying inflation was ½ per cent in the June quarter and headline inflation was only slightly lower. Both Consumer Price Index (CPI) inflation and measures of underlying inflation were running at a little under 2 per cent in year-ended terms.
  • In their discussion of the outlook for the domestic economy, members noted that the Bank’s forecasts for output growth and inflation were largely unchanged from three months earlier.
  • The available data on activity suggested that GDP growth had increased in the June quarter, following weaker-than-expected growth in the March quarter. Output growth was expected to reach around 3 per cent in year-ended terms during 2018 and 2019, which was a little higher than estimates of potential growth. Beyond the June quarter, rising employment and stronger household income growth were expected to support consumption growth, which was forecast to be a little above its average of recent years.
  • Members observed that recent data had suggested further improvement in the labour market. Employment had increased in every state since the start of 2017, including solid growth in the mining-exposed states. This provided further evidence that the drag on economic activity from earlier declines in the terms of trade and falling mining investment were running their course. Over this period, around 165,000 full-time jobs had been created, labour force participation had risen and average hours worked had increased.
  • The unemployment rate had been little changed in June at 5.6 per cent and underemployment had edged lower over prior months. Indicators of labour demand had pointed to further employment growth and little change in the unemployment rate over coming quarters. On the other hand, expectations of ongoing low wage growth could weigh on consumption growth. Spending could also be constrained by elevated levels of household debt, especially if housing market conditions were to weaken.
  • Turning to the inflation forecast, members noted that underlying inflation was expected to be close to 2 per cent in the second half of 2017 and to edge higher over the subsequent two years.

International Economic Conditions

  • Economic conditions had strengthened over the prior year and the improvement had broadened beyond international trade. In particular, growth in business investment had picked up in several advanced and emerging economies, including the United States, Canada, Japan and a number of economies in east Asia. However, as members noted, even though labour market conditions had already tightened in some advanced economies, wage growth and core inflation had remained subdued.
  • Growth in GDP in China had been a little stronger than expected in the June quarter, supported by accommodative financial conditions and expansionary fiscal policy. The strengthening in conditions in the industrial sector over recent months had been broadly based; construction activity had been resilient, although housing market policies introduced in some cities over the preceding year had been effective in lowering overall housing price inflation. Demand for both consumer goods and Chinese exports had picked up. The strength in manufacturing and construction activity had contributed to higher demand for steel.
  • Growth in China was expected to ease in 2018 and 2019 because of structural factors such as a declining working-age population, as well as policies to address financial risks. Members noted that the outlook for the Chinese economy remained a significant source of uncertainty. In particular, it was unclear how the authorities would negotiate the difficult trade-off between growth and the build-up of leverage in the Chinese economy.
  • In the three largest advanced economies, investment growth had picked up and employment growth had supported growth in household incomes and consumption.

Financial Markets

  • Members noted that over recent months most attention in international financial markets had been on changes in expectations regarding monetary policy. In a number of advanced economies, monetary policy was expected to be somewhat less accommodative than previously anticipated.
  • In China, financial market conditions also remained accommodative, but had tightened since the end of 2016 as the authorities had instituted a range of measures to reduce leverage in financial markets.
  • Members noted that there had been a broadly based depreciation of the US dollar over 2017, including against the Australian dollar.

Considerations for Monetary Policy

  • In considering the stance of monetary policy, members noted that the improvement in global economic conditions had continued, particularly in China and the euro area. Labour markets had continued to tighten in a number of economies, but inflation had generally remained subdued. There had been a broadly based depreciation of the US dollar. The Australian dollar also had risen to levels last seen in 2015.
  • Domestically, the outlook was little changed. The forecast was for GDP growth to increase to around 3 per cent during the forecast period, supported by the low level of interest rates. Inflation was still expected to increase gradually as the economy strengthened. However, a further appreciation of the exchange rate would be expected to result in a slower pick-up in inflation and economic activity than currently forecast.
  • Employment growth had been stronger over recent months, so the forecasts for the labour market were starting from a stronger position. Wage growth had remained low but was still expected to increase a little as conditions in the labour market improved.

UK CPI—4.30pm 15 August 2017

UK CPI was +2.6% in July. It is still below the BOE’s hard upper limit of 3% but still above their 2% target.

US Retail Sales m/m—8.30pm 15 August 2017

Name Actual Expected Last (June)
Headline retail sales m/m +0.6% +0.4% +0.3%
Core Retail sales m/m +0.5% +0.3% +0.1%


June: Headline: Revised to +0.3% from -0.2%, Core: Revised to +0.1% from -0.2%

May: Headline: Revised to +0.0% from -0.1%

US Crude oil inventories—10.30 pm 09 August 2017 Wednesday

US crude inventories decreased by -8.945 million barrels on the expectation of -3.38 million drop. Baker Hughes US oil rig count decreased by 5 from 768 to 763. Is the rig count establishing a top? Oil production was 9502k barrels per day for week ending 11/08/2017, an increase from 9423 barrels per day in the previous week.

FOMC Meeting Minutes—2am 17 August 2017

Summary of main points: Real GDP and labour market are strong. Inflation continues to be weak but they are hopeful that inflation will start to pick up and trend towards their 2% long run target. The Fed is losing faith in Trump’s ability to enact policies, especially fiscal policy. They feel that the date and size of economic stimulus will be push back and decreased in size respectively. Some members were willing to decide on a start date for Quantitative Tightening but most decided to push back on announcing the start date to a later meeting.

Main Points

Staff Review of the Economic Situation

  • Labor market conditions continued to strengthen in June and that real gross domestic product (GDP) likely expanded at a faster pace in the second quarter than in the first quarter. The 12-month change in overall consumer prices, as measured by the price index for personal consumption expenditures (PCE), slowed again in May; both total consumer price inflation and core inflation, which excludes consumer food and energy prices, were running below 2 percent. Survey‑based measures of longer-run inflation expectations were little changed on balance.
  • Total nonfarm payroll employment expanded solidly in June, and the average monthly pace of private-sector job gains over the first half of the year was essentially the same as last year. The unemployment rate edged up to 4.4 percent in June. The overall labor force participation rate edged up in June, and the share of workers employed part time for economic reasons rose a bit. Average hourly earnings for all employees increased 2-1/2 percent over the 12 months ending in June, about the same as over the comparable period a year earlier but a little slower than the rate of increase in late 2016.
  • Total U.S. consumer prices, as measured by the PCE price index, increased 1-1/2 percent over the 12 months ending in May. Core PCE price inflation was also 1-1/2 percent over that same period. Over the 12 months ending in June, the consumer price index (CPI) rose 1-1/2 percent, while core CPI inflation was 1-3/4 percent.

Staff Economic Outlook

  • In particular, real GDP growth, which was modest in the first quarter, was still expected to have stepped up to a solid pace in the second quarter and to maintain roughly the same rate of increase in the second half of the year. Thus, as in the June projection, the staff projected that real GDP would expand at a modestly faster pace than potential output in 2017 through 2019. The unemployment rate was projected to decline gradually over the next couple of years and to continue running below the staff’s estimate of its longer-run natural rate over this period.
  • The staff’s forecast for consumer price inflation, as measured by the change in the PCE price index, was revised down slightly for 2017 in response to weaker-than-expected incoming data for inflation. Beyond 2017, the forecast was little revised from the previous projection, as the recent weakness in inflation was viewed as transitory.
  • On the one hand, many financial market indicators of uncertainty remained subdued, and the uncertainty associated with the foreign outlook still appeared to be less than late last year; on the other hand, uncertainty about the direction of some economic policies was judged to have remained elevated.

Participants’ Views on Current Conditions and the Economic Outlook

  • Labor market had continued to strengthen and that economic activity had been rising moderately so far this year. Job gains had been solid, on average, since the beginning of the year, and the unemployment rate had declined, on net, over the same period. Household spending and business fixed investment had continued to expand. On a 12month basis, both overall inflation and the measure excluding food and energy prices had declined and were running below 2 percent.
  • In light of continued low recent readings on inflation, participants expected that inflation on a 12-month basis would remain somewhat below 2 percent in the near term. However, most participants judged that inflation would stabilize around the Committee’s 2 percent objective over the medium term.
  • Nevertheless, several participants noted that uncertainty about the course of federal government policy, including in the areas of fiscal policy, trade, and health care, was tending to weigh down firms’ spending and hiring plans. In addition, a few participants suggested that the likelihood of near-term enactment of a fiscal stimulus program had declined further or that the fiscal stimulus likely would be smaller than they previously expected.
  • Many participants noted that much of the recent decline in inflation had probably reflected idiosyncratic factors. Still, most participants indicated that they expected inflation to pick up over the next couple of years from its current low level and to stabilize around the Committee’s 2 percent objective over the medium term. Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside.
  • In their discussion of monetary policy, participants reaffirmed their view that a gradual approach to removing policy accommodation was likely to remain appropriate to promote the Committee’s objectives of maximum employment and 2 percent inflation. They observed that the Committee could afford to be patient under current circumstances in deciding when to increase the federal funds rate further and argued against additional adjustments until incoming information confirmed that the recent low readings on inflation were not likely to persist and that inflation was more clearly on a path toward the Committee’s symmetric 2 percent objective over the medium term.
  • Participants also discussed the appropriate time to implement the plan for reducing the Federal Reserve’s securities holdings. Participants generally agreed that, in light of their current assessment of economic conditions and the outlook, it was appropriate to signal that implementation of the program likely would begin relatively soon, absent significant adverse developments in the economy or in financial markets. Al­though several participants were prepared to announce a starting date for the program at the current meeting, most preferred to defer that decision until an upcoming meeting while accumulating additional information on the economic outlook and developments potentially affecting financial markets.

Donald Trump says this, Kim Jong Un says that (ongoing spat)

North Korea is now able to put a miniaturized warhead onto a rocket.

President Trump: “North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen… he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before.”

KPNA: “The KPA Strategic Force is now carefully examining the operational plan for making an enveloping fire at the areas around Guam with medium-to-long-range strategic ballistic rocket Hwasong-12 in order to contain the U.S. major military bases on Guam including the Anderson Air Force Base.”

In my opinion, as much as they hate each other, neither Donald Trump nor Kim Jong Un will be willing to be the first one to strike at the other party. Donald Trump will not do a preemptive strike on North Korea even if the Pentagon said it was planning one. A preemptive strike will be seen as an offensive attack on the sovereign land of North Korea by the international community. It will also give Kim Jong Un reason to retaliate in defense. Kim Jong Un will not fire the first missile because if he does so, North Korea will be completely annihilated by the massive military might of the United States. Therefore since neither party is willing to strike first, it will be safe to assume that a nuclear war will not start in the Korean Peninsula.

When dealing with the controversial issue of nuclear weapons, the conversation will always be directed towards the final outcome of “Mutually Assured Destruction”. During the Cuban Missile Crisis where Soviet Union and United States were both increasing their nuclear stockpiles, some historians commented that the Cold War was actually one of the safest period in modern history. This was because neither party was willing to be the first one to strike the other and take on the responsibility of starting the next world war. The two parties also knew that a nuclear war would also lead to the complete destruction of both sides. Therefore by simple game theory, it is safe to assume that both parties (Trump and Jung Un) will eventually realise that no action is the best choice.

Coming week: 21 August 2017 – 25 August 2017

US Crude oil inventories—10.30 pm 23 August 2017 Wednesday

Another draw in inventories and rise in production?

Trade Ideas

Gold Short

Gold hit resistance at $1300. The recent bullish momentum for gold was mainly due to the spat between Trump and Kim. However, the war of words had died down. It is highly unlikely that the ongoing conflict will lead to a full blown war as explained in a section above.

NZD/USD long to watch

NZD/USD having broken out from resistance zone at 0.73 is now retesting it to see if support holds.


  • The probability of rate hike by December 2017 currently stands at 40% (0% for September and 1.9% for November) and does not seem to have traction to climb upwards.
  • Trump White House is a complete debacle. Flynn, Spicer, Priebus, Bannon. Who’s next? Half-hearted denouncement of White Supremacist, failure to repeal and replace Obamacare. Even with both legislative branches, Trump is still unable to push conservative agendas through Congress.


1) Divergent monetary policy between the Federal Reserve in the US and RBNZ in New Zealand. The Fed is steadfast in its resolve to hike rates and initiate Quantitative Tightening. On the contrary, the RBNZ intends to keep interest rates accommodative for extended duration of time because growth and inflation are still weak.


USDJPY is now testing horizontal support trend line at 109 area which is an area of interest for a buying opportunity.

There is a divergence in monetary policy between the Federal Reserve and the Bank of Japan. The Fed had been and is planning to continue to tighten their monetary policy by hiking Federal Funds Rate and initiating Quantitative Tightening. The Bank of Japan having admitted to failing to make progress in attaining their inflation target of 2% (The BOJ pushed back the expected date at which 2% inflation target will be met to FY 2019) will have no choice but to loosen its already uber-loose monetary policy further if it is to reach its inflation target.

However, macroeconomic data out of US in recent times had not been the best. Also, the recent war of words between Trump and Kim had led to safe havens like the Japanese Yen to be bought. The lack of inflation in Japan may not be all that bad for the Japanese economy. This point of view was argued by Noah Smith on Bloomberg View and is a very good read.


The Week Ahead - Gold and McGregor both going down The Week Ahead - Long Kiwi