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Japanese core CPI could justify monetary stimulus – Forex News Preview
November 30, 2017 5:26 pmVideo
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It’s been almost two years since the Bank of Japan decided to adopt an aggressive monetary stimulus using negative interest rates to end deflation and force price growth up to the central bank’s stability target of 2.0%. However, the BOJ’s preferred inflation measure, the core CPI index which excludes volatile items, showed a slow reaction since the policy implementation, turning positive only in early 2017. Yet, the index was last still well below the target at 0.7% y/y, persuading policymakers to maintain the current ultra-easy monetary strategy, while price weaknesses have forced them to downgrade inflation forecasts in their last meeting in October.
Friday’s readings on the core CPI index will be now in main focus, with analysts anticipating the gauge to edge up by 0.1 percentage points to 0.8% y/y in October, while they also expect the headline CPI index to retreat from 0.7% y/y to 0.2%. Moreover, the jobs-to-applications ratio and the unemployment rate released alongside the above data will be also in the spotlight given that the central bank predicts an improving labour market to drive prices higher. Particularly, October’s jobs-to-applications ratio is estimated to rise slightly by 0.1 points to a fresh 43-year high of 1.53, while the unemployment rate is projected to remain steady at a 23-year low of 2.8%.
In other releases, Japanese household spending is expected to decline by 0.4% y/y in October after a contraction of 0.3% in the previous month, signalling weaker inflationary pressures. In contrast, business spending is expected to expand at twice the previous mark in the third quarter – at 3.3% y/y.
If indeed the data verify the BOJ’s optimism on the economy and supports the efficiency of the current monetary policy, then the yen will likely post gains, pushing dollar/yen down to test the 200-day exponential moving average at 111.68. From here, the 50% Fibonacci retracement level of the upleg from 107.31 to 114.72 (September 8 – November 11) at 111 might come into view. Any close below this point would further increase risk to the downside, shifting focus towards the 61.8% Fibonacci of 110.14. If this occurs, then the bias will turn bearish from neutral in the short-term as the pair will break below the Ichimoku cloud. Alternatively, disappointing readings could work for the dollar, leading dollar/yen up to the area between the 38.2% and the 23.6% Fibonacci (111.90 – 113.00).
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