Daily Outlook

Another Bank remains on hold The Bank of Japan ended its two-day policy meeting overnight, and it too made no change in policy, as expected. In its statement, the Bank said that Japan’s economy has continued to recover moderately and that inflation expectations appear to be rising on the whole. As for the indicators, the country’s current account surplus fell to JPY 125bn in June on a seasonally adjusted basis, from JPY 384bn, more or less in line with expectations of a decrease to JPY 110bn. I think the BoJ under Gov. Kuroda is being overly optimistic. It seems from the data that inflation is once again subsiding, and with exports languishing and the current account surplus gradually disappearing, I expect that the authorities may feel the need to take steps later in the year to weaken the yen. US President Barack Obama authorized targeted air strikes against Islamic militants in Iraq, the first since the nation’s pullout of troops in 2011. The authorization came after the US military began the delivery of humanitarian relief in the form of air drops by US jets. Oil prices rose after the announcement, amid expectations that oil supplies from Iraq may be interrupted. Nevertheless, we believe that the actual airstrike is needed to see the oil prices go further up. Safe haven assets such as gold and JPY also strengthened after the President’s authorization, leading us again to a risk-off environment. On Thursday, the ECB Governing council decided to keep policy unchanged, as expected. At the press conference following the meeting, ECB President Mario Draghi repeated that the Bank will keep rates low for an extended period of time in view of the current outlook for inflation. Draghi also said that the ECB has hired a consultant to design an ABS purchase programme (or quantitative easing by any other name). This has been done with the expectation of using it but no final decision has been taken. They will use QE if the medium-term outlook changes. Draghi also said that he sees a significant rise in short Euro positions and that the fundamentals for a weaker exchange rate are much better. He also added that markets observe divergent rate paths in the euro-area and the US. We certainly do! In fact this has been the driving force behind our view that EUR/USD is likely to trend lower Such comments only add to our conviction. Today: During the European day, the only indicators worth mentioning are Germany’s trade and current account surpluses, which are expected to increase in June. French industrial production for June is also coming out and the forecast is for the figure to show a rebound. In the UK, the trade balance for June is coming out and the forecast is for the deficit to have narrowed a bit. No major data is due from the US. From Canada, the point of interest will be the unemployment rate for July, which is estimated to have remained unchanged at 7.1%. However, the change in employment for the same month is expected to turn to positive again. For the last couple of months the employment figure have been switching from positive to negative and vice versa. If this pattern continues and the release beats the estimate, we will most likely see CAD strengthening like the previous times.