Glimmer of hope that quantitative easing might be nearing its end
At last there is a glimmer of hope that the quantitative easing programmes being pursued by several leading central banks could be nearing their end, which could mute USD gains even if the US economy becomes turbo-charged under the new US administration.
If so, that could bring a return to more ‘normal’ currency markets driven more by interest rate differentials rather than negative interest rates and the creation of new money. In the case of the US, the Federal Reserve’s QE programme is long behind it as it becomes ever more hawkish over interest rate rises.
Also, the IMF says global growth should rise to 3.4% in 2017, still a fairly weak number, but better than 2016's 3.1%.
In the UK, where the Bank of England is conducting a GBP60bn QE programme, talk is turning to interest rate rises as the country had the fastest growing G7 economy last year.
In the Eurozone, political pressures are mounting for the European Central Bank to curb its own money creation efforts. Eurozone inflation recently hit its highest in three years at 1.1% and is forecast to be 1.3% this year (still below the ECB’s 2% target) coupled with GDP growth of 1.5%. However, the ECB is coming under increasingly strong pressure from Germany to stop QE so inflation doesn’t have a chance to become entrenched and gather momentum. Any sign of it being reined in and that would be very positive for the EUR as would ending negative interest rates, which are harming Eurozone banks.
Over in Japan, there is less political pressure to end QE & capping a 0% yield on 10-year government bonds. Nonetheless there is talk of tapering with business and consumer confidence looking healthier and with Japan’s GDP forecast to grow 1.5% with inflation seen around 0.6-1.6% for 2017. This is a welcome departure from stagnation and deflation. Another point is that if the USD were to regain its upward momentum, whilst JPY weakens because of QE, it may not be long before US President Donald Trump starts lambasting the country for currency manipulation as it runs a big trade surplus with the US and may even threaten import tariffs.
These are only small signs of possible change and they are yet to gain real momentum. But if they did, they would signal a change to more normal currency markets.
However, there are some big mega-trends, which could keep some of these central banks printing.
Japan has a terrible demographic problem and the Eurozone’s isn’t a lot better. This reduces GDP growth rates and is deflationary. The other issue for the Eurozone, what would happen to peripheral bond yields if the ECB shuttered its bond buying programme? It could lead to yield divergences and a return to problems in Eurozone bond markets. Nonetheless, if German inflation starts moving ahead of other countries such as France and Italy – it will create some awful dilemmas for the ECB’s monetary policy and some spectacular arguments with Germany.
TECHNICAL ANALYSIS: USD/JPY – uptrend looks set to resume
With Donald Trump now in power, the USD has witnessed something of a retreat and the USD index is now resting around key support above 100.00. In the run-up to his election victory, USD conveniently soared against JPY doing much of the heavy lifting for the Bank of Japan. However, since mid-December 2016, USD has been slipping against the Japanese currency – the question then is whether that is a reversal of USD’s bull run or just a pause in a bigger upward move?
Until recently, everyone was a USD bull so the pull-back is not surprising. Its pace and relative shallowness suggests it’s a pause rather than a reversal of the old trend. After all the fundamentals still seem to favour USD over JPY and rallying US stock markets reflect strong economic hopes.
If USD is on the cusp of resuming its upward trend and clawing back lost ground then it will need to successfully tackle the following resistance levels: 115.37, 116.58 and ultimately 118.66. Also, daily RSI levels are neutral at 50, the slow stochastics have given a buy signal and the 50-day moving average is still pointing upwards, though it could be acting as a resistance level at the moment. If what looks to be the build-up of a strong break-out attempt fails, then support levels around 113.78-80, 112.58-61 and 111.92 will come into play.
By Justin Pugsley, Markets Analyst, MahiFX