Yen off 6-week low after "helicopter money" mania shot down

The yen hovered above six-week lows on Friday after comments from Bank of Japan Governor Haruhiko Kuroda dented speculation Japan may be preparing a radical "helicopter money" economic stimulus.

The yen bounced back to 105.88 yen per dollar from 107.49, its six-week low against the U.S. currency touched on Thursday.The rebound was triggered by Kuroda's comments on a BBC Radio 4 interview on Thursday playing down the idea of helicopter money, essentially a policy of injecting cash directly to the economy in some form by printing money.

With Prime Minister Shinzo Abe crafting a massive spending package worth about $190 billion to bolster the economy, some speculators had bet the BOJ could be financing the additional spending - likened by economists to dropping large amounts of cash from a helicopter.

The BBC later said its interview with Kuroda had been conducted in mid-June, helping to cool the yen's gains.Certainly his comments have not dispelled expectations of easing. I suspect a rough consensus in the market is increase in buying of ETFs and REITs as well as 0.10 percentage point cut in interest rates," said Koichi Takamatsu, head of forex at Nomura Securities.

Few market players take Kuroda's words at face value after he introduced negative interest rates in January only days after he said publicly that he was not considering such measures.

A small number of market players, however, think the BOJ may opt to ease later to keep its dwindling fire power.

"I think the BOJ is more likely to ease in November when the government's supplementary budget will be ready, rather than now. I'm not sure if the BOJ feels it needs to act now, when even the Bank of England has not eased," said Minori Uchida, chief currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

FOMC minutes: Fed to 'wait and see' for even longer due to Brexit

Little news in the minutes from the June FOMC meeting, which took place just eight days before the UK's EU vote. Most of the information we already got in the FOMC meeting statement and Fed chair Yellen's press conference after the end of the meeting. 

The Fed was already in  a wait and see' mode before the UK's EU vote due to the mixed signals from data (strong pickup in activity growth in Q2 but weak employment growth). With Brexit this is even more true and we think the Fed will 'wait and see' for even longer. 

Market participants agree that the Fed is on hold for now as markets only price in a fifty-fifty chance of a Fed hike before year-end next year. 

The minutes confirm the message Fed chair Janet Yellen sent at the press conference, where she said that a Brexit ' could have consequences ' for the US economic outlook and financial markets developments. The minutes state that the Fed will have to 'wait for additional data regarding labor market conditions as well as information that would allow them to assess the consequences of the U.K. vote for global financial conditions and the U.S. economic outlook '. 

Now that we know the UK voted to 'leave' the EU, we have lowered our growth forecasts for the US economy from 1.9% to 1.7% this year and from 2.3% to 1.9% next year. The reason is that the US economy is not immune to a slowdown in Europe. Hence, we also expect the Fed to be on hold until June 2017 and only to hike twice next year (we expect the following hike in December 2017) . As we have argued for some time, most voting FOMC members have a dovish-to-neutral stance on monetary policy and would rather postpone the second hike than hike prematurely. 

We think the risk to our Fed view is balanced so the next hike could come sooner if the impact of Brexit on the economy is smaller than we currently expect (or later if bigger). 

Otherwise, the FOMC mainly discussed how to interpret the mixed data, especially the weak jobs reports. The minutes state that the FOMC ' discussed a range of interpretations of these data '. ' Many ' FOMC members think that the jobs growth in recent months have been lower than the ' underlying pace ' due to transitory factors as noise and strikes. ' Some ' noted that other labour market indicators have been stronger while also ' some ' thought that it could be ' indicative of a broader slowdown ' in the economy. 

The next important data release is on Friday when the June jobs report is due. Even if we see a rebound after the weak reports in April and May, this would probably not be enough to bring back the Fed hiking theme due to Brexit. The Fed needs data from after Brexit to analyse the impact of Brexit on the economic situation in the US before moving on. Since PCE core inflation is still below 2%, inflation expectations (both survey-based and market-based) have fallen and wage inflation is still subdued, the Fed can afford to stay patient. 

Brexit Outcome Stuns Markets – What Comes Next?

The outcome of Thursday’s historic EU referendum, in which nearly 52% of UK voters opted to leave the European Union, stunned markets globally in its immediate aftermath on Friday morning. The vote counting began with a surprisingly sizeable lead for Leave at over 60% of voters in Sunderland, and the pro-Brexit camp never looked back as it continued to maintain a modest advantage throughout the vote tally, even after the expectedly pro-Remain London votes came in.

Prior to the voting results being known, most of Thursday and the previous several days were characterized by the financial markets’ strong conviction that Remain would prevail. Despite an extremely tight contest in pre-vote polling, this was partly due to betting odds-makers predicting an overwhelmingly high probability of a Remain victory. To say that financial markets were caught off-guard when the Leave camp began early in the vote count to show its strength would be an understatement. After the referendum’s outcome, when UK Prime Minister David Cameron announced his upcoming resignation as a result, the market impact was even more pronounced.

As it became increasingly clear during the vote count that a Brexit outcome might actually occur, markets experienced exceptionally high volatility, most notably in the currency markets. In particular, the British pound and Japanese yen underwent vast and rapid swings throughout the course of the vote count. As expected, the British pound was most heavily pressured due to the widely-projected, negative economic implications of a Brexit, with GBP/USD plunging at one point to more than a 30-year low of 1.3226 in the aftermath of the referendum outcome. Also as expected, the Japanese yen surged strongly due to its status as a safe haven currency in times of market turmoil, with USD/JPY dropping to a new multi-year low just below 99.00.

When the pound and yen were pitted against each other in the form of GBP/JPY, the results were even more dramatic. The currency pair dropped by a massive 20 big figures to a new 3½-year low just above 133.00. Finally, although the euro rose sharply against the even more heavily-pressured pound, the common currency had its own fair share of trouble after the referendum results. EUR/USD plunged to a low of 109.10 before paring much of its losses on Friday morning.

The market impact was not limited to currencies, however, as gold spiked due to its status as a safe haven asset and global equities experienced large initial drops on the news. By Friday afternoon in Europe, most of these reactions had been cut back significantly, but exceptional pressure on sterling continued to define the financial markets.

Now that the news is out and the immediate market reactions have occurred, what might be next with respect to the Brexit outcome? The process of separation between the UK and European Union is expected to be long and drawn-out, likely taking at least a couple of years with many negotiations, both political and economic, occurring in the process. On the near-term horizon, however, Brexit implications will probably be felt relatively quickly and on a global basis. The obvious question now is which EU countries might be next in holding their own referenda for leaving the European Union. If this becomes an increasing occurrence amongst current EU countries, the viability of both the European Union and the Eurozone (and in turn, the euro currency) could become even more questionable.

But even more pressing at the moment is Brexit’s potential impact on major central banks. Bank of England Governor Mark Carney made a televised appearance on Friday morning stating that the central bank “will not hesitate to take measures as required” with respect to the extreme volatility in the pound as a result of the referendum. The other major currency most affected by Brexit, as noted, has been the Japanese yen. There have been numerous warnings in the recent past and the immediate run-up to the referendum from Japanese officials touting Japan’s readiness and willingness to intervene should the yen become too strong or experience exceptional volatility. If the yen spike continues, given that the USD/JPY dropped well below 100.00 at one point on Friday, this could very well fulfill the prerequisites for an impending currency intervention by Japan in attempts to stem the yen’s rise.

Finally, the Brexit outcome is very likely also to have a substantial impact on the US Federal Reserve. Since the results of the referendum have been announced, the implied probability of a Fed rate hike any time this year has plunged dramatically, with some market participants now even speculating on a possible rate cut. If this actually comes to pass, the Fed will have finally relented by joining other major central banks on the prevailing global trend of monetary easing.

As the Brexit outcome continues to be digested and through the next few weeks, the markets should continue to exhibit lingering volatility as the trends going forward are being determined. For both the pound and euro, this could mean persistent pressure for the time being, particularly for the euro if other EU countries begin to take the UK’s lead. Safe haven assets like gold, the yen and the Swiss franc, should also remain supported as markets fluctuate and find direction. The noted prospect of Japanese (and possibly Swiss) intervention, however, could potentially help to limit the yen’s gains if it occurs. As for the US dollar, if Brexit affects the Fed’s prior monetary stance as much as might be expected, the greenback could also come under significant pressure going forward.

There is an incredible theory that a Brexit won't actually happen even if the public votes for it

A really crucial detail about the upcoming EU referendum has gone virtually unmentioned and it is probably the most crucial detail: Parliament doesn't actually have to bring Britain out of the EU if the public votes for it.

That is because the result of June 23 referendum on Britain's EU membership is not legally binding. Instead, it is merely advisory, and, in theory, could be totally ignored by UK government.

Instead, what will happen next if the public votes for a Brexit will be purely a matter of parliamentary politics.

The government could decide to put the matter to parliament and then hope to win the vote, Green says. Alternatively, ministers could attempt to negotiate an updated EU membership deal and put it to another referendum. Finally, the government could just choose to totally ignore the will of the public.

Pro-EU MPs could even argue that ignoring the public's will would be parliamentary sovereignty in practice - something that Leave campaigners argue has been conceded to Brussels.

The only way that a Brexit vote would have weight in law would be if the government decided to invoke Article 50 of the Lisbon Treaty. This is when an EU member state chooses to activate the process of withdrawing from the 28-nation bloc.

Article 50 would make Britain's EU membership a legal matter. However, even if the June 23 referendum produces a Leave majority, the government would not be obliged to invoke the legislation.

A vote for Brexit will not be determinative of whether the UK will leave the EU. That potential outcome comes down to the political decisions which then follow before the Article 50 notification. The policy of the government (if not of all of its ministers) is to remain in the EU. The UK government may thereby seek to put off the Article 50 notification, regardless of political pressure and conventional wisdom.

This has to go down as one of the largest pieces of small print in British political history.

The overwhelming majority of the British public is probably totally unaware of this legislative loophole. As far as most Brits understand, Britain will no longer be an EU member if Leave wins next week's referendum.

Interestingly, parliament choosing to ignore the British public isn't as unthinkable as conventional wisdom leads us to believe. In fact, according to the BBC, MPs have already discussed the possibility.

Speaking to the BBC earlier this month, an unnamed pro-EU MP said: "We would accept the mandate of the people to leave the EU. But everything after that is negotiable and parliament would have its say. The terms on which we leave are entirely within my remit as a parliamentarian and that is something for me to take a view on."

SNB Braces for Brexit Tsunami as Officials Prepare Franc Defense

If Thomas Jordan finds himself in the midst of a foreign-exchange tsunami this month, it won’t be of his own making.

Brexit Watch: The pound, the polls, and the probability of Brexit, all in one place

In January 2015, the Swiss National Bank shook markets when it gave up its cap on the franc. Now central bankers the world over are casting a nervous eye toward London amid fear the U.K.’s departure from the European Union could upset investors, disrupting economic growth and forcing officials to maintain their extraordinarily loose policy even longer. SNB President Jordan warned back in April that a so-called Brexit would cause “enormous stress” in Europe.

A British vote to leave the EU on June 23 would practically guarantee a surge in the franc, popular among investors at times of market stress, according to a Bloomberg survey of 23 economists. The SNB will counter that appreciation with more aggressive interventions, the majority of those polled said. Some even expect a cut to the deposit rate, already at a record low of minus 0.75 percent.

“Obviously Brexit would be a game-changer,” said Alan McQuaid, chief economist at Merrion Capital Group Ltd. in Dublin. “If the franc appreciated back to the 1.00-1.05 range and held there for a prolonged period, then the SNB would have to consider its options, with cutting the deposit rate further the most likely initial response.”

Having dropped its 1.20-per-euro ceiling on the franc -- described by Swatch Group AG Chief Executive Officer Nick Hayek as a “tsunami” at the time --, the SNB spent the past year using negative interest rates and occasional interventions to take pressure off the currency, and succeeded in weakening it roughly 3 percent in the past 12 months.

Yet with the franc back on an appreciation course and the cost of hedging its gains on the rise, the Brexit vote is threatening to erodemonths of the SNB’s hard work. Last week, the Swiss currency appreciated past 1.09 per euro for the first time since mid-April. It traded at 1.08862 at 2:23 p.m. on Zurich on Monday.

One Week

The SNB’s next quarterly interest-rate decision is scheduled for Thursday. Given that’s a week before the U.K. plebiscite, it’s unlikely to make any adjustments to policy. In addition to keeping the deposit rate unchanged, economists see it holding its target for three-month franc Libor at between minus 0.25 percent and minus 1.25 percent, according to data compiled by Bloomberg.

The central bank’s announcement on June 16 will come with an updated growth and inflation forecast and Jordan and fellow rate setters Fritz Zurbruegg and Andrea Maechler will brief the press in Bern. That’s a few hours before the rate decision of the Bank of England, whose Governor Mark Carney has warned a vote to leave on June 23 could usher in a recession.

In the U.K., polls have been too close to call.

Another cut to the SNB’s deposit rate is “possible,” Zurbruegg, the SNB’s vice president, told Basler Zeitung in an interview published on June 4. Yet a few days later, his predecessor Jean-Pierre Danthine, who has retired from policy making, said that the effective lower bound was “very close to minus 75 basis points” and that to go much lower, “radical measures” that are “simply not democratically enforceable today” would be needed.

According to the 22 economists who answered the question, the SNB can go as low as minus 1.25 percent before investors begin to hoard cash in a bid to circumvent the charge. Concerning interventions, which the SNB uncharacteristically admittedto having done at the height of the Greek debt crisis a year ago, the central bank can grow its balance sheet to 140 percent of annual output, from just over 100 percent currently, the survey found.

SNB will be able to intervene a lot more before its credibility gets called into question,At the moment, the SNB’s policy is broadly supported -- even with a constantly growing balance sheet.

Market was caught off guard by hawkish FOMC minutes

Market was caught off guard by hawkish minutes from the 27 April FOMC meeting and is all of a sudden reassessing its views on US monetary policy.

Following the release of the minutes, as the committee expressed support for a possible (data dependent) hike in June, the market implied-odds of a June hike jumped from roughly 15% to 35%; the odds stood at just 7.4% two-days ago before a number of hawkish Fed speakers.

This doesn't change the call for a September hike, but steers the market away—at least for now—from overly dovish US rate expectations that have largely dominated over other themes this year. This also means that the great support that EM assets have received since after the January selloff—which may not be entirely due to, but definitely is rooted in such implied odds—may start to falter, in the same way as oil prices are immediately feeling the heat of a stronger dollar.

European currency markets are trailing behind with the high yielders (TRY, ZAR and RUB) skewed towards weakness vs the CEE currencies flat or slightly positive. It’s still too early to say which direction may prevail, but we suspect that correlations with equities will continue to hold, and stock markets are currently in the red. So if the equity slump advances, there will be little in the way of further EM FX corrections. This is in line with our medium term view, but doesn’t reconcile with our more optimistic short-term one that is based on the assumption that the market would remain dovish on implied US rate expectations until the end of Q2.

If  wrong on this assumption, however,the majority of EM FX are recovering rapidly bridging the gap between short term and medium term forecasts; in other words, we could see  Q3/Q4 forecasts materializing a lot faster than we thought.

Australia's Central Bank Cuts Key Rate to 1.75% to Combat Disinflation

Australia’s central bank cut interest rates to a fresh record low as it moves to counter the emergence of disinflation that’s swept the developed world and limit currency gains that could complicate an economic transition.

Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, as predicted by 12 of 27 economists surveyed. Data last week showed quarterly deflation in the consumer price index and the weakest annual gain on record for core inflation -- which the RBA aims to keep between 2 percent and 3 percent on average.

“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in his statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”

The currency has risen as much as 15 percent since mid-January and is likely to further restrain import prices in Australia. The resurgent Aussie also casts doubt on the sustainability of both the Australian labor market’s improvement and the burgeoning tourism and education industries that led a 1 percentage point of gross domestic product turnaround in services exports. 

Aussie Plunges

The Australian dollar fell after the decision, trading at 75.66 U.S. cents as of 3 p.m. in Sydney, from as high as 77.19 cents earlier in the day.

The RBA has also been monitoring the impact of tighter regulations on home loans as residential prices in Sydney and Melbourne surged on easy policy.

“In reaching today’s decision, the board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate,” Stevens said. “At present, the potential risks of lower interest rates in this area are less than they were a year ago.”
 
Global policy is diverging and creating cross-currents as Europe and Japan move to negative rates and the U.S. tightens policy. That, together with a resurgent price for Australia’s biggest export, iron ore, has helped lift the Aussie dollar. 

Iron Ore Rebound

The RBA reiterated that “an appreciating exchange rate could complicate” the economy’s transition. It also noted the rebound in the iron ore price in response to policy easing in China, Australia’s biggest trading partner.

“Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years,” Stevens said. “Australia’s terms of trade remain much lower than they had been in recent years.”

He also noted that China’s growth rate “moderated further” in the first part of the year. 

Stevens was upbeat on Australia’s growth after the economy expanded 3 percent last year. “Indications are that growth is continuing in 2016, though probably at a more moderate pace,” he said. “Labor market indicators have been more mixed of late.”

Fed’s slipped up by delaying rate hikes. Here’s why

The U.S. Federal Reserve has made a "policy mistake" by holding back further rate hikes in 2016 as the U.S. economy is growing strongly and a hawkish monetary policy is therefore needed, according to a report by London-based ETF Securities.
The Fed passed on raising its interest rate target at its March meeting this year citing global economic and financial situation as a risk. Policymakers had previously signaled in December that four rate rises were likely in 2016.
However, the report from ETF securities suggests the lack of hike in March was an error in judgment from the US policymakers. It seems like the Fed's board of governors has become more dovish since the December meeting and the market is now pricing in only one rate hike by the end of the year.
ETF Securities, however, believes the Fed has slipped up.
"Real GDP (gross domestic product) trends indicate that the pace of U.S. economic growth is solid. While the growth path of real GDP is not as strong as pre-crisis levels, there is no evidence of a slowdown. Such a growth path warrants tighter monetary policy," ETF securities said in a statement.

ETF Securities' stance is, however, contrary to what a number of economists believe. Official data shows the U.S. economic growth slowed to 1.4 per cent in the fourth quarter of 2015, down from 2 per cent in the third quarter of 2015. A number of banks have already revised their outlook for the year due to factors such as global economic uncertainties.
Citigroup, for example, recently downgraded its outlook for the U.S. for 2016-2017, saying the risks were very evident. The revised figures show that the GDP will grow by 0.9 percent in the first quarter and 1.7 percent for the year. "Despite such tepid growth prospects, we project a slow decline in the unemployment rate to 4.7 percent by end-2016, and 4.5 percent by end-2017," William Lee, head of North America economics at Citigroup said in his research outlook. He predicted inflation to remain subdued.
However, James Butterfill, head of research and investment strategy at ETF Securities says while the Fed is currently stuck in a liquidity trap, the U.S. economy is strong to sustain another rate hike.
"Looking at the key factors that have historically defined rates hikes, namely the non-accelerating inflation rate of unemployment (NAIRU), wage growth and nonfarm payrolls, all suggest a rate hike should occur. Delaying hikes will likely have a much more negative impact on asset classes and the global economy," Butterfill told CNBC
He further explains that current real GDP has recovered and the quarterly dip in the figures is very common during rate hike periods.
"Investors and industry leaders become very concerned with the impact that the first rate hike will have on the economy – a short term negative fund. This in turn leads to lower corporate confidence and consumer confidence, leading to a temporary dip in GDP growth, this is history repeating itself."


The report also says that currency volatility remains elevated as investors continue to worry over the potential for rate hikes derailing the U.S. economic recovery. However, the ETF Securities report says there is no danger of modest rate hikes impacting economic growth with the threat actually coming from uncertain policy guidance from the Fed.
"Such a situation seems circular, with markets fretting over Fed decisions and the Fed concerning themselves with market volatility – an issue outside the scope of its mandate," the report says, predicting that the U.S. recovery will continue in 2016.
The minutes of the March meeting highlighted the consensus within the Fed around a cautious outlook for the economy.
"If the Fed's global concerns diminish in the near term, their worries about the U.S. economy should also lessen," David Kelly, chief global strategist at JP Morgan Asset Management told CNBC via email. "The U.S. economy, like the global economy, faces challenges ranging from a very volatile and unpredictable race for president to uncertainty about the strength of any potential bounce-back in corporate earnings. Moreover, equity valuations look close to fair value rather than cheap in absolute terms. "

This is what could create some turbulence Friday

  Fed officials from different camps speak ahead of Friday's Wall Street open, and they could make some waves in already seasick markets.

Market nerves are starting to get a little frayed right now. You can see it in the risk markets  there's potential (for market impact). What's been interesting to me is you've had a parade of Fed officials some of whom are extremely dovish, and they've been a whole lot less pessimistic and a lot less dovish than (Fed Chair) Janet Yellen, since the last meeting."

Speaking on Friday is New York Fed President William Dudley, who is seen as closely aligned with Yellen — in the dove camp. He speaks at 8:30 a.m. EDT on the regional and national economy in Connecticut. Philadelphia Fed President Patrick Harker gives remarks at an investment conference in Camden, New Jersey, at 9 a.m. EDT, and he has recently called for the central bank to get on with rate hikes. Dallas Fed President Rob Kaplan speaks later on the political economy of Texas and Mexico at 9:30 a.m. EDT.

Unfortunately they seem in muddled message mode right now,. Markets will also digest the comments of more hawkish Kansas City Fed President Esther George, who was to speak Thursday evening. George is the one member who dissented at the last central bank meeting, when it voted to keep rates unchanged.

There will also be comments to consider from Yellen herself, plus her last three predecessors, at an unprecedented panel discussion Thursday evening. 

Yellen said Thursday that the U.S. economy is strong and said it is not a bubble economy. She reiterated that the Fed is taking a cautious approach on raising rates and said the Fed's rate hike in December was not a mistake.

Her comments Thursday evening were viewed as more optimistic than in her appearance last week, and they helped support risk markets, including oil. Now the question is which way will the next speakers lean

·                                 

Brexit: GBP COULD FALL A FURTHER 15-20% vs USD

A Brexit vote could lead investors to worry about the UK’s ‘twin deficits’. To date, these have largely been ignored by the FX market. Brexit could raise concerns and Mark Carney, the BoE Governor, recently warned that Brexit could leave the UK reliant on “the kindness of strangers” in an environment of global economic volatility.

Already a gap has opened up between the observed level of sterling and the level implied by interest rate differentials. If the currency market is pricing in around a 33% probability of a Brexit vote, GBP-USD could fall by around another 15-20% should a Brexit vote occur (i.e. if the probability shifted from 33% to 100%). This would see GBP-USD falling to levels not witnessed since the early 1980s. We also think that the GBP would come under pressure against the EUR. Indeed, EUR-GBP could move towards parity in the aftermath of a Brexit vote.”

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