Morning Commentary: Wait and See

Foreign Exchange - Morning Commentary
Wait and See 
Share this story:
Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
The Bank of Japan will announce its latest rate decision tonight.  After taking aggressive action with its COVID-19 response from March through June, it is widely expected that the bank will leave all policy targets unchanged.  The summary of opinions from the June meeting supports this with the majority of members believing the bank has done enough to cushion the COVID blow for now.

The bank’s confidence in taking a wait and see approach has also been aided by upbeat economic data and government actions that have helped corporate conditions.  To this point, bank lending has risen 6.5% YoY in June, the fastest growth in rates since this measure began in 1991.  Given this, there remain areas of weakness especially in the sectors hard hit by collapses in tourism and COVID-19 related social distancing.  Longer term, BoJ Governor Kuroda has effectively ruled out rate hikes before his term is scheduled to end in April 2023.   

As a result, the market’s focus will be on the bank’s yield control management with specific emphasis on the super long end.  The BoJ has committed to keeping its 10-year yield around zero, but it has expressed a desire to see a steeper curve.  Expect Governor Kuroda to be asked about this at his press conference.  So long as markets remain orderly, there is no reason to think this stance will change.  

Regarding USDJPY, it has been range bound since the beginning of April.  However, after the summer, yen volatility could rise.  The risk for early Japanese elections/change in leadership continues to rise, and of course, the US has its presidential election.  On the monetary front, the markets will likely gain further clarity around the implementation or lack thereof of further stimulus (forward guidance/yield curve control).  All these factors, and more, have the potential to shake USDJPY out of its current subdued trading range. 
  • California Governor Newsom’s decision to close all indoor entertainment delivered a reality check to markets and contributed to the risk off tone that took over late in yesterday’s trading session.  California, Texas and Florida represent three of the states hardest hit by the virus and represent ~30% of US GDP.  With much of the re-opening efforts on hold or reversed, there are serious downside risks to Q3 GDP.  
  • In a show of support, Vice President Pence told governors that the White House will back them on any measures taken to control the virus.  Outside the US, Hong Kong tightened its rules and Tokyo is considering declaring another state of emergency. 
  • US-China tensions took another step up with the US rejecting China’s claims in the South China Sea.  This largely symbolic challenge marks the reversal of a previous policy not to take sides in maritime disputes in the area.  On China’s side, the country announced that it was imposing sanctions on Lockheed Martin after the US approved a deal to supply missile parts to Taiwan.   
  • The US posted a record budget deficit of $864 billion in June.  This one-month number is almost as much as the deficit for all of 2019 and brings the 12-month total deficit to a record high of $3 trillion with no signs that this trend will reverse.
  • Positive news around Europe’s recovery fund continues with Italy reportedly willing to accept more stringent criteria required by the Frugal Four.  The EU will hold its’ summit this Friday and Saturday where it will attempt to strike a deal on the recovery fund.  
  • US core CPI beat expectations at 0.2% versus expectations for a 0.1% rise. 
  • Eurozone industrial production numbers missed expectations, rising 12.4% MoM against expectations for a 15.0% rise.  UK GDP data was also disappointing as it grew 1.8% MoM against expectations for a 5.5% increase. 
  • China’s trade surplus was smaller than expected at $46.42 billion vs expectations for $59.60 billion.  
If we can help you with any Foreign Exchange needs, please email or call (800) 447‑4133.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Facebook Twitter LinkedIn Google Plus YouTube
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Unsubscribe from this list  |  Update email preferences
This message has been sent to Please do not reply to this email. To ensure the delivery of future emails, please add to your email address book or safe sender list.
Copyright ©2020 City National Bank – All Rights Reserved.
350 South Grand Avenue, 12th Floor, Los Angeles, CA 90071
City National Bank is a subsidiary of Royal Bank of Canada.
Equal Housing Lender
NMLSR ID# 536994 | City National Bank Member FDIC


Popular posts from this blog

Acquisitions or Alliances: What's Your Growth Strategy?