Central Bank Junkies - 'Japanification'

Conventional wisdom advocates that the only way to manage an ever increasing world

population via sustained economic growth. The problem with that of course is that unless extremely well managed, perpetuating the edifice comes at a huge detriment to the planet- a detriment most would agree is now unsustainable. So the paradox is clear. Granted, ultimately solving this problem is nigh on impossible under conventional thinking, and surely comes at a huge price anyway? Perhaps a price that no one in the developed world yet wants to really contemplate? Consequently, the drive to sustain global economic growth goes on...

Meanwhile, economists, pundits and theorists talk much about the ‘Japanification’ of other

economies (“Swissification” doesn’t seem to roll off the tongue so easily, but it should) and

most recently the EU has been the subject of such chatter.

Strange therefore that Japan, with a declining population has been unable, or more rather,

unwilling to even try to wean itself off zero monetary policy when it should have taken the

medicine a long time ago. The problem is that going cold turkey is never an easy process,

especially the longer one leaves it. Perhaps removing the addiction after two decades is

simply too painful a process to even contemplate now?

Personally, I don’t think this issue was ever wasted on the Fed, and of all the world’s major

central banks they have been the only one to go to rehab and try to kick the habit- rightly so

in my humble opinion. Soaring global debt, unsustainable asset price inflation and widening

the wealth divide is not ultimately going to do any central bank any favours- clearly it will

only make their policy decision making much less flexible.

Meantime, on Friday the latest US jobs numbers did the dollar no favours whatsoever. The

disappointing ADP numbers from earlier last week were indeed replicated in the wider

report with non farm payrolls rising by just 75k where an increase of around 185k had been

expected. Average earnings disappointed somewhat too, coming in at just 3.1% on an

annualized basis, below the consensus for a 3.2% increase.

Following the news over the weekend that Mexico has caved to Trumps emigration

demands, Asian stock markets are a sea of green this morning and that’s helped the JPY

weaken as the USDJPY rebounds, back past 108.50 ahead of the European opening. Right

now the odds of this one recapturing the 109.00 handle look live to me. However, just

beyond there also lies trend line resistance. That’s best explained by looking at a 30day

chart of the pair which I have included below.

As you can see on this chart, the red line I have drawn in there comes in around 109.15 at

present and that might just cap this latest topside rebound. Meantime the impact of higher

stock markets and a weaker JPY has not been lost on gold which has shed over $20 from the

highs posted on Friday after the disappointing US payroll report. Clearly, the JPY and Gold

are still linked at the hip folks!

The weaker JPY has in turn had an impact on the EURUSD, which as I suggested last Friday

morning, did make some headway once it recaptured 1.13, but perhaps somewhat

surprisingly, only to as high as 1.1348 following the disappointing US jobs numbers. As I

write this morning that’s dribbled back below 1.13 helped by the USD index which is

recovering back past 96.80.

The other thing to note at the start of this week is the CNH which is weakening to fresh

interim lows this morning with the USDCNH creeping ever closer to a test of the much

touted, all important 7 level. That move is having an impact on the AUDUSD as that fails

again to hold above 0.7000 and falls back towards 0.6950. Data released earlier today

showing a sizeable drop in Chinese imports last month hasn’t done the AUD any favours

either, but given the US/China trade dispute I don’t think such data should come as much of

a surprise really.

Oh, and in case you missed it, back home the Tory party leadership contest is going to hot

up this week. In the past I often wondered why Michael Gove was such a motor mouth, but

last weekend’s revelations have certainly helped me better understand that! Gove for PM-

Seriously? Consequently, its Bojo’s to lose now for sure and as he stiffens his ‘no deal’

rhetoric reality might once again begin to dawn on the currency- we shall see.

Generally speaking, it’s a fairly quiet week ahead in respect of economic releases. By the

time you get to read this article a whole raft of UK data will have been released this morning

so I cannot say what the impact might be. Beyond all that though, the data highlight this

week as far as the UK is concerned is the unemployment report tomorrow.

Elsewhere the latest US CPI and retail sales data will be very much on the markets radar too,

especially with the Fed monetary policy decision on 19th looming ever larger. The only

monetary policy decision due this week is from the Swiss National Bank where no changes

are expected.

Personally speaking, as weak as the latest US payroll data was last Friday, I do not see the

Fed quitting rehab and being railroaded into cutting rates next week, unless we get further

fresh evidence of a significant economic slowdown in the meantime.

Meanwhile, the two biggest currency junkies on the street (the BOJ and the SNB) are possibly soon about to be joined by the PBOC it seems as that lucky number looms. Actually, when you come to think of that, 8 is lucky number in China isn’t it?

Important Economic Releases Due This week

11/06- 9.30am UK May Unemployment Report

11/06- 11.00am US NFIB Small Business Optimism Index

12/06- 1.30pm US May CPI Inflation Report

13/06- 2.30am Australia May Unemployment Report

13/06- 8.30am Switzerland-SNB Monetary Policy Decision

(No change to current benchmark rate expected)

14/06- 1.30pm US May Advanced Retail Sales Report

14/06- 3.00pm US University of Michigan Consumer

Sentiment Index- Preliminary June Reading