Inflation No Longer the Only Risk

Economic

Summary:

Federal Reserve (Fed) Chair Jerome Powell’s testimony yesterday wasn’t overly optimistic but it revived the expectation that a rate cut could come sooner rather than later.

In the first day of his semiannual testimony before Senators, Powell said – for the first time in three years – that inflation is no longer the only threat to the US economy but the cooling jobs market also is. Although he didn’t want to offer a clear timeline when asked when the Fed would lower interest rates, Powell said that the latest jobs report sent a ‘pretty clear signal’ of a cooler labor market.

The main takeaway is that, moving forward, the jobs data will generate as much euphoria as the inflation numbers and investors will be more eager to put an accidental uptick, or less ideal inflation numbers, in perspective and remain confident that things – in terms of rate cut expectations – are moving toward the right direction.

As such, and with a strong sale of 3-year notes, the US 2-year yield didn’t take another dive but consolidated its advance to the south following last Friday’s soft jobs data near the 4.60%, the 10-year yield consolidated near 4.30% but the US dollar didn’t ease.

A selloff hit the euro after Moody’s warned France that its sovereign rating is at risk if its finances get any worse. The French 10-year yield jumped yesterday, but the spread with the German 10-year yield further eased. The EURUSD tested but found support near 1.08, while the European equities didn’t have a good session. The French CAC 40 dropped 1.56%, the German DAX fell 1.28, while the British FTSE 100 – which has nothing to do with the political shenanigans on the continent and which is, on the contrary, promising a much warmer and pleasant political weather, fell 0.65% as BP shed 20 points to the index following a 4.30% fall after predicting a writedown on the value of a plant in Germany of $1-2bn and warnings of ‘significantly lower’ refining margins. The news comes just a day after Exxon also gave a lower guidance for Q2 earnings – hurt by weaker gas prices and compressed refining margins. Exxon is also under a rising pressure these days, the stock price lost more than 10% since the April peak.

In energy, US crude cleared a minor Fibonacci support yesterday, the MACD turned negative for the first time in more than a month hinting that trend and momentum indicators are now in favour of a further downside correction. But oil is still in the medium-term positive trend that’s building since the beginning of June and support to this bullish trend sits near the $80pb. And there is a good chance that we see dipbuyers return to the market at this level as rising rate cut expectations are positive for reflation assets and oil is one of them.

Nat gas has been unable to stop the bleeding that started a month ago. Trend and momentum indicators remain bearish, but the market is approaching oversold market territory, which had, back in February, triggered a decent rebound.

Elsewhere, the rising rate cut expectations sent the S&P500 and Nasdaq to fresh records yesterday. Bank and tech stocks were particularly cheery. Bank stocks gained as Powell said that the regulators are close to changing their plan to force big banks to hold significantly more capital.

On the flip side of the world, inflation in China came in below expectations, while the Reserve Bank of New Zealand (RBNZ) maintained its policy rate unchanged at 5.5% for the 8th straight meeting and said that the policy will remain restrictive to make sure that inflation returns to their 1-3% target range. But, the bank hinted that the degree of restraint will be gradually adjusted to the expected decline in inflationary – which is expected to happen in the second half of the year. The kiwi-dollar tested the 200-DMA to the upside, but could well find support at this level if tomorrow’s US CPI update brings the Fed doves and the dollar bears back in charge.

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Warren Takunda

Economic

Central Bank

Summary:

Yen value down a lot recently. Trade issues and demographics to blame, plus Japan's central bank keeping rates low. Author says bank needs to change approach to help the economy.

The yen's depreciation over the past two years has been rapid and astonishing. It was only 13 years ago when the currency reached a historic peak of 75.32 to the U.S. dollar. The current rate, around 161 yen to the dollar, is the same as that recorded in December 1986.

The yen's slide is now a popular topic for daily conversation, and there is growing debate about what the weakened currency means for the Japanese economy and how the Bank of Japan should deal with it.

In considering this issue, merely focusing on the nominal exchange rate overlooks a more fundamental change. It is the real exchange rate, adjusted for inflation, not the nominal rate, that determines the competitiveness of exporters as well as the purchasing power of the currency.

As purchasing power parity theory predicts, the currency of a country where the inflation rate is lower than others, such as in Japan, tends to appreciate over the long run. In other words, the yen is depreciating in real terms at a much greater pace than the headline numbers indicate. In fact, the yen's current trade-weighted real exchange rate is as low as it was in 1970, one year before the breakdown of the Bretton Woods system that fixed the yen's dollar rate at 360.

Why has the yen depreciated so much? It is useful to explore the causes by breaking the exchange rate movement into two parts -- the long-term trend and the short-term movement around it.

As for the long view, there was a bifurcation point in 1995. Until then, the yen's real exchange rate reflected long-term appreciation. From 1995 onward, we observed clear depreciation, even though the yen hit a record high in nominal terms in 2011.

Several factors are responsible for the real exchange rate depreciation. One is the worrisome and growing goods and services trade deficit, which is a dramatic change from the huge surplus in the 1980s, at the height of trade frictions with the U.S. What is most worrisome in terms of competitiveness is the growing deficit in the trade of advanced digital services such as cloud computing.

Another is growing outward foreign direct investment. Considering this reflects a shrinking domestic market on the back of demographic change, it is no coincidence that the peak of the yen's real exchange rate coincided with the peak of the Japanese working-age population.

In any event, industry competitiveness as well as this investment pattern, a reaction to Japan's demographic reality, cannot be reversed by monetary policy.

By contrast, monetary policy plays some role in the cyclical or short-term movement of the exchange rate. Central banks in many advanced economies in 2022 began raising policy rates aggressively in the face of elevated inflation. Yet the BOJ has maintained an ultra-low rate in the range of zero to 0.1%, even after exiting from its negative interest rate policy and dropping its yield-curve control tool in March this year.

So should the BOJ tighten monetary policy to prevent the yen's depreciation?

On this point, the BOJ's stance is emphatic: Monetary policy should be guided only by the outlook for inflation and growth, not by the exchange rate. This is absolutely right. So the real issue is how the yen's exchange rate is affecting the outlook for inflation and growth.

Japan's consumer price inflation rate has exceeded the BOJ's price stability target of 2% for more than two years now. Yet the central bank judges that the "underlying inflation rate" is below 2%.

In explaining this, the BOJ nowadays frequently refers to two components. It explains it like this: "The first component refers to the force that pushes up prices due to cost-push pressure led by the rise in import prices. In contrast, the second component refers to the force that leads to further price rises through the linkage between wages and prices, mainly against the backdrop of tightening labor market conditions while the economy improves."

The BOJ is arguing it needs to confirm that the second component is expected to raise inflation in a more sustainable manner before it raises policy rates. To me, the BOJ's logic seems somewhat contradictory because the second component itself is weakened. Maintaining low interest rates discourages household consumption by suppressing real household income because the yen's depreciation due to continued monetary easing reduces real wages by increasing the inflation rate. Unless consumption becomes strongly supported by increased real household income, Japan's economy will have difficulty achieving either the BOJ's 2% inflation rate or sustainable economic expansion -- or both.

Is it appropriate to make sustained 2% inflation the overriding imperative for monetary policy deliberations?

I am skeptical, and comparing Japan and Switzerland can help explain why. Both nations in recent decades have had similar experiences with low inflation, and both have adopted negative interest rate policies. But the policy responses to the recent elevated inflation have differed. The Swiss National Bank raised its policy rate to 1.75%, followed by two 0.25% cuts. I suspect one of the reasons why the SNB is more flexible than the BOJ is due to how the inflation target is framed. In Switzerland, it is "below 2%."

Sticking with a hard 2 in a short timeframe is unproductive. It risks overlooking more important developments that could undermine sustainable economic growth. It might be the aforementioned adverse impact on growth, an accumulation of financial imbalances or something else.

On top of that, it is well known that precisely measuring inflation is a daunting task. A case in point is a measurement of the inflation rate for housing services, which accounts for about 20% of the basket of Japan's consumer price index. Unlike in the U.S., quality deterioration due to the passage of time is not adjusted in Japan, which grossly underestimates the actual service inflation rate. There are many other reasons why we cannot be confident about the precision of measuring inflation.

We therefore need to remove the straitjacket of the hard 2% target and adopt a more balanced approach in conducting monetary policy.

Source: NikkeiAsia

Risk Warnings and Disclaimers

Add to Favorites

Samantha Luan

Economic

Commodity

Summary:

Gold prices rose slightly in Asian trade on Wednesday as comments from Federal Reserve Chair Jerome Powell sparked increased speculation over when the central bank will begin cutting interest rates.

Among industrial metals, copper prices sank, wiping out a bulk of a recent recovery following mixed inflation signals from top copper importer China.

Gold saw some strength in recent sessions as the dollar dropped amid increased expectations for a September rate cut. But the yellow metal stalled as the Fed still gave no clear signals on the path of interest rates.

Spot gold rose 0.2% to $2,367.73 an ounce, while gold futures expiring in August rose 0.3% to $2,373.90 an ounce by 00:20 ET (04:20 GMT).

Gold steadies after Powell testimony, CPI data on tap

Prices of the yellow metal stalled their recent rally after Powell flagged some cooling in the labor market and progress in bringing down inflation.

But the Fed Chair reiterated the central bank’s commitment to its 2% inflation target, and gave no direct cues on when the Fed will begin cutting rates.

While traders largely maintained their bets on a September rate cut, Powell’s testimony spurred some increased caution before key consumer price index inflation data due on Thursday. The reading is expected to show inflation cooling further in June, albeit slightly.

The dollar found some strength following Powell’s testimony. The Fed Chair is also set to testify before the House later on Wednesday.

Gold’s outlook has been tied largely to the path of interest rates this year, especially as high rates pressured precious metal markets for the past two years.

Other precious metals retreated on Wednesday. Platinum futures fell 0.3% to $997.05 an ounce, while silver futures fell 0.1% to $31.025 an ounce.

Silver has largely outperformed gold in recent months, with the metal’s industrial applications giving it an edge over gold.

Copper prices dip on mixed China inflation

Benchmark copper futures on the London Metal Exchange fell 0.3% to $9,844.50 a tonne, while one-month copper futures sank 0.4% to $4.5652 a pound.

Sentiment towards the red metal was dented by mixed inflation data from top importer China. Chinese CPI inflation shrank in June as spending remained under pressure from a weak economic outlook for China.

While producer price index inflation shrank at its slowest pace in 16 months, China’s deflationary trend still remained largely in play.

Source：Investing

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

Central Bank

Summary:

Federal Reserve Chair Jerome Powell showed more openness to easing monetary policy but stressed the need for confidence in inflation reduction before lowering rates. He highlighted recent economic cooling and emphasized caution.

Federal Reserve Chair Jerome Powell appeared to show a greater willingness to consider easing monetary policy Tuesday, while continuing to express a strong commitment to getting inflation down to the Fed’s 2% target.

Powell, in the first of two days of testimony on the Fed’s semi-annual Monetary Policy Report to Congress, said that recent economic data require the Fed’s policy making Federal Open Market Committee to pay greater attention to potential economic weakness – not just to lowering inflation.

Powell told the Senate Banking Committee that he and his colleagues still want to gain “greater confidence” that inflation is headed “sustainably” down to 2% before lowering short-term interest rates.

But he didn’t stop there, going on to caution more strongly than he has in the past against the risks of waiting too long to lower rates.

“(I) in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he told the Senators.

Like other Fed policymakers who have lately put increasing emphasis on downside risks to the “maximum employment” side of the central bank’s “dual mandate,” Powell warned that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.” Powell’s remarks come in wake of another set of mixed employment numbers that tilted toward softness. The Labor Department reported that non-farm payrolls grew a better than expected 206,000 in June, but prior months job gains were revised down by a cumulative 111,000. Much of the remaining job gains were in government. The ADP employment report showed private-sector job growth slowed for the third straight month in June.

Average hourly earnings also slowed to a 3.9% year-over-year pace.

What’s more, the unemployment rate ticked up another tenth last month to 4.1%, its highest level since October 2021, after having gone as low as 3.4% in January 2023. Some economists tout increased joblessness as an early recession indicator.

Softer labor market conditions have coincided with mounting signs of slowing economic growth, the latest being the June drop in the Institute for Supply Management’s non-manufacturing survey, which showed a contraction in service sector activity for the second time in three months..

Meanwhile, Fed officials are taking cheer that disinflation seems to have resumed after stalling out in the first quarter. Although inflation remains well above the Fed’s 2% target, the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, was flat in May and rose 2.6% from a year earlier. The core PCE was up a tenth, but it too was 2.6% higher than a year earlier.

The differently weighted Consumer Price Index also moderated in May, but ran hotter than the PCE, rising 3.3% overall and 3.4% over the last 12 months. The June CPI report, due Thursday morning, is being anxiously awaited.

In toto, the latest data have heightened speculation that the FOMC will lower the federal funds rate before long.

At its June 11-12 meeting, the FOMC left that key money market rate in a 5.25-5.50% target range, where it’s been since the Committee last raised it last July 26. In so doing, the FOMC reiterated that it ”does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Powell echoed that language in his Monetary Policy Report testimony.

At the June meeting, FOMC participants projected just one 25 basis point rate cut in its policy rate this year to a median 5.1% — down from the three cuts projected in March and from the six or more cuts financial markets were hoping for prior to a series of discouraging first quarter inflation reports.

Recent signs of slower economic activity and softer labor market conditions, together with more encouraging inflation data have renewed hope on Wall Street that the FOMC will start cutting its policy rate – not at its July 30-31 meeting, but perhaps as early as its Sept. 17-18 meeting, and perhaps multiple times beyond that.

Against the backdrop of cooling economic activity and moderating inflation, Powell did not explicitly tip his hand on when or by how much rates might be lowered, but seemed to give more hope for monetary easing than he has in the past.

Once again, he echoed the FOMC statement in saying he and his colleagues need to gain more “confidence” that inflation is headed “sustainably” toward 2%, but he expressed encouragement about recent “further progress” against inflation. And he seemed to focus more on potential downside risks to the economy.

Seemingly utilizing subtle rhetorical shifts and changes of emphasis, Powell suggested that the FOMC’s “risk management” approach to monetary policy is undergoing a recalibration. No longer is the focus solely on attaining “price stability” as defined by the 2% flexible inflation target, now that price increases have come down from their 9.1% peak of two years ago.

“The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” he testified, echoing the June FOMC policy statement.

“Incoming data for the first quarter of this year did not support such greater confidence,” he added.

However. the Fed chief went on to suggest that since the first quarter there is greater reason for “confidence” on getting inflation down to target.

“The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent,” he said.

Powell suggested that, after holding the funds rate steady for seven straight meetings, the FOMC could decide to change direction at one of its upcoming meetings, but made clear it will be proceeding cautiously and patiently and employing data dependence.

“We continue to make decisions meeting by meeting,” he said., “We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation.”

“At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he went on. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Though he seemed to open the door wider to rate cuts, it is questionable whether Powell was signaling that the FOMC is gearing up to cut rates as soon or as much as some have been hoping for.

While intimating a greater willingness to consider rate cuts if recent trends toward moderation of inflation and labor market tightness persist, Powell’s testimony continued to reflect some hesitancy to make monetary policy significantly less restrictive, amid lingering doubts among some of his colleagues about whether policy is sufficiently restrictive.

Powell’s testimony clearly opens the door to one or more rate hikes this year. At the same time, it is questionable whether Powell was signaling that the FOMC is gearing up to cut rates as soon or as much as some have been hoping for.

His assessment of economic and labor market conditions were measured. He pointed to signs of cooling, but betrayed no sense of alarm.

“Recent indicators suggest that the U.S. economy continues to expand at a solid pace,” he said. “Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year”

“Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending,” he continued. “We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.”

In the past, Powell has said that an “unexpected weakening” of the labor market would require the Fed to “respond.” His testimony did not reflect concern that recent cooling of job markets were either “unexpected” or unduly weak.

“In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated,” he said. “The unemployment rate has moved higher but was still at a low level of 4.1 percent in June.”

Powell further noted that payroll job gains averaged 222,000 jobs per month in the first half of the year, and he said “strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in labor force participation among individuals aged 25 to 54 and a strong pace of immigration.”

“As a result, the jobs-to-workers gap is well down from its peak and now stands just a bit above its 2019 level,” he said, adding that “nominal wage growth has eased over the past year.”

On the inflation front, Powell observed that it “has eased notably over the past couple of years but remains above the Committee’s longer-run goal of 2%.”

He added a note of encouragement, however. “After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” he said.

What’s more, he added, “longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”

Source: MaceNews

Risk Warnings and Disclaimers

Add to Favorites

Alex

Economic

Forex

Summary:

120-day correlation between yen, yuan has risen to record high. Asian currencies will be hit by yen, yuan losses, Mizuho says.

Asia’s two most important currencies are moving together like never before, increasing the risk of a broad decline among their regional peers amid the relentless strength of the dollar.

The 120-day correlation between the dollar-yuan and dollar-yen currency pairs climbed to 0.54 this week, a record high in data compiled by Bloomberg starting in 2007. A reading of 1 would mean the two move in lockstep.

The yuan is frequently described as a “currency anchor” for the rest of Asia given that other nations compete with China in global export markets. The yen is similarly influential due to Japan’s heft as the world’s third-largest economy. Closer Yen, Yuan Correlation Is Danger Sign for Asian Currencies_1

Closer Yen, Yuan Correlation Is Danger Sign for Asian Currencies_1

“It certainly beggars belief to suggest Asia FX are unfettered by yen and yuan weakness,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore. “The tight supply-chain and investment linkages as well as inter-dependencies mean that Asia FX will be materially impacted by yen and yuan bears.”

Weakness in either the yen or yuan often flows across to the other. China’s currency suffered its biggest one-day decline in two months on March 22, three days after the Bank of Japan disappointed markets by failing to flag future interest-rate hikes when it ended its negative rate policy.

Further yuan weakness may compel central banks across Asia to allow their own currencies to depreciate faster to maintain export competitiveness.

There’s an increasing chance the Reserve Bank of India will relax its “cap on USD/INR as India sees China as a competitor in manufacturing exports and a stronger INR versus CNY could hurt India,” Morgan Stanley strategists Min Dai and Gek Teng Khoo wrote in a research note last week.

The increasing correlation of the yen and yuan is also a concern for global currencies as a simultaneous decline in the pair is seen adding to the broad dollar gains.

“Stability in the yen and yuan is critical to Asian FX because the weakening momentum of these two currencies will likely accentuate the broad dollar strength and will impact Asian FX as well,” said Peiqian Liu, an Asia economist at Fidelity International in Singapore.

Source:Bloomberg

Risk Warnings and Disclaimers

Add to Favorites

Cohen

Economic

Summary:

"Import prices are likely to keep rising due to sustained yen declines and elevated energy prices,"

Japan's wholesale inflation accelerated in June as the yen's declines pushed up the cost of raw material imports, data showed on Wednesday, keeping alive market expectations for a near-term interest rate hike by the central bank.

Rising global commodity costs and a phase-out of gasoline and fuel subsidies also pushed up wholesale prices, the data showed, a sign of heightening inflationary pressure.

The data will be among factors the Bank of Japan (BOJ) will scrutinise at its next policy meeting on July 30-31, when the board will release fresh growth forecasts and debate whether to raise interest rates from current near-zero levels.

The corporate goods price index (CGPI), which measures the price companies charge each other for their goods and services, rose 2.9 per cent in June from a year earlier, BOJ data showed, matching a median market forecast.

It accelerated from the previous month's revised 2.6 per cent gain and rose at the fastest year-on-year pace since August 2023. The index, at 122.7, hit a record high for the seventh straight month.

The yen-based import price index climbed 9.5 per cent in June from a year earlier, accelerating from a revised 7.1 per cent rise in May, in a sign the weakening currency was inflating the price companies charge each other for imported raw material. The pace of increase in the index was the fastest since February 2023.

"Import prices are likely to keep rising due to sustained yen declines and elevated energy prices," said Yutaro Suzuki, an economist at Daiwa Securities.

"Inflation may accelerate toward autumn reflecting the impact of yen falls since the start of this year, which will be critical to the BOJ's decision on when to hike rates," he said.

The BOJ ended eight years of negative interest rates and other remnants of its massive stimulus in March, taking a landmark step toward normalising ultra-loose monetary policy.

BOJ Governor Kazuo Ueda has said the central bank will raise interest rates if it becomes more convinced that Japan was on track to durably hit its 2 per cent inflation target.

He has also said the BOJ will take "monetary policy action" if yen moves have a big impact on inflation, a view echoed by BOJ board member Seiji Adachiin late May.

Source:Reuters

Risk Warnings and Disclaimers

Add to Favorites

Alex

Central Bank

Economic

Summary:

The Reserve Bank of New Zealand is not far off cutting interest rates, as long as domestic inflationary pressures allow. That means next week’s June quarter consumer price inflation report could sow the seeds for the RBNZ to begin lowering interest rates as soon as August. NZD/USD has fallen heavily in response.

Overview

The Reserve Bank of New Zealand (RBNZ) is not far off cutting interest rates, as long as domestic inflationary pressures allow. That means next week’s June quarter consumer price inflation report could sow the seeds for the RBNZ to begin lowering rates as soon as August. NZD/USD has fallen heavily in response.

RBNZ unleashes the doves

The RBNZ set the tone for the policy statement early, choosing the headline “Inflation Approaching Target Range” as opposed to “Official Cash Rate to remain restrictive” in May.

Fitting with the dovish tweak, the RBNZ said restrictive monetary policy had “significantly reduced consumer price inflation”, a noticeable deviation from six weeks ago when it stated it had simply “lowered” inflation. It now expects headline inflation will return to within its 1-3% target range in the second half of the year, less specific than May when it forecast the end of the calendar year. Again, another step towards rate cuts.

The were dovish remarks sprinkled throughout the statement with the committee noting “government spending will restrain overall spending in the economy” while there were “signs inflation persistence will ease in line with the fall in capacity pressures and business pricing intentions.” Two new and important additions relative to views communicated six weeks earlier.

While the RBNZ continued to suggest that policy needs to remain restrictive, it put a caveat on that guidance, acknowledging “the extent of this restraint will be tempered over time consistent with the expected decline in inflation pressures”.

Rate cuts loom in New Zealand

With price stability being the RBNZ’s primary mandate, that essentially translates to when it sees further evidence that it will meet its mandate, it will reduce the level of restriction. That means rate cuts.

It also means the RBNZ could be easing as soon as next month should it find that evidence in next Wednesday’s June quarter consumer price inflation report. Interest rates markets think so, shifting the probability of a cut on August 14 from around a one-in-three chance to now being more likely than not.

New Zealand two-year interest rate swaps which are heavily influenced by RBNZ rate expectations plunged following the statement, tumbling 13 basis points to 4.665% as at the time of writing, well below the 5.5% current cash rate.

NZD/USD plunge stalls at 200DMA

NZD/USD fell sharply on the dovish RBNZ shift, losing as much as 0.8% before stalling ahead of the 200-day moving average at .60728, an important level that has encouraged buying in the past. Below, .6050 is the next layer of support before a trip back into the 50c region looms. Above, resistance is found at .6105, .6150 and .6218.

While the momentum is to the downside, I wonder whether it’ll stick. On Thursday we receive the next US consumer price inflation report for June. If we see another soft underlying print of 0.2% or less, it’s likely the Fed will join the RBNZ in shifting towards a less restrictive stance. If the Fed signals looming rates cuts, it’s doubtful NZD/USD will be trading lower.

Source：forex.com

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Economic

Central Bank

Why has the yen depreciated so much? It is useful to explore the causes by breaking the exchange rate movement into two parts -- the long-term trend and the short-term movement around it.

In any event, industry competitiveness as well as this investment pattern, a reaction to Japan's demographic reality, cannot be reversed by monetary policy.

So should the BOJ tighten monetary policy to prevent the yen's depreciation?

Japan's consumer price inflation rate has exceeded the BOJ's price stability target of 2% for more than two years now. Yet the central bank judges that the "underlying inflation rate" is below 2%.

Is it appropriate to make sustained 2% inflation the overriding imperative for monetary policy deliberations?

We therefore need to remove the straitjacket of the hard 2% target and adopt a more balanced approach in conducting monetary policy.