USDJPY closed around 112.69 in the US session Friday, closed almost flat (+0.01%) on Goldilocks US NFP report, mixed Fed talks and a plunge in US stocks on US-China cold war tensions. The US market/USD was under renewed pressure after a report that the US readies charges against alleged Chinese hackers for attacks on technology service providers and the Chinese hacker charges could come next week, in latest US action against Beijing.
The market was also waiting for the bail hearing of the Huawei CFO arrested in Canada on 1st December. As per the report, the Canadian prosecutor said the Huawei CFO Meng was arrested for “fraud” and the US warrant was issued in August. Meng was arrested in Vancouver in transit from Mexico to Hong Kong. The crown lawyer said the US accuses a Huawei unit (Skycom) of doing business in Iran. The market is now anticipating no-bail for Meng and she will be eventually extradited to the US and face prosecution, which will be negative for the risk-on trade. The charges are linked to skirting US sanctions on Iran and Meng has been charged with conspiracy to defraud multiple banks.
As per the weekend report, the final verdict on the bail hearing of Meng was further scheduled to Monday, but even if Meng is denied bail by the Canadian court, the actual extradition process will take at least 2-3 months and in the meantime, Meng has the legal opportunity to appeal against her bail and extradition to higher Canadian courts and ultimately, the Canadian government (justice Minister) will decide whether Canada will extradite Meng.
So it would be a long drawn process and the end result in could be also that Meng would not be extradited by Canada to the US considering their “deep bonded” relationship with China and the US will also not pursue so much for the extradition for Meng for the “larger national interest” of Trade truce with China.
For China, it will be another opportunity to buy more time until the next US Presidential election to continue trade talks without any meaningful result. Meng will also be eventually granted bail in return of Chinese embassy security (assurances), while she would continue to fight her extradition battle to the US from China. The whole incident of Huawei CFO Meng arrest at the Vancouver transit airport may be also a “Chinese trap” for the US; otherwise, Canada will not risk its diplomatic relationship with China in this US extradition request, in which it has nothing to gain.
So in effect, US-China trade discussion will go on but may not reach a conclusive agreement in the next 90-days for this Huawei CFO extradition issue, but Trump will extend the temporary truce for another 90/180-days as he can’t afford 25% tax on Chinese goods for the US consumers. And in between, we may see more US-China trade/cold war/truce headlines, which would keep the market volatile.
On Friday, USD was also supported by hawkish comments from Fed’s Brainard as she argued for gradual rate hikes in 2019 contrary to the market expectation of a pause after Dec hike. Brainard also said she's using a great deal of data dependence and the Fed is in the vicinity of its dual goals (mandates), while from last crisis, the Fed has learned that it has a good toolkit.
Brainard said: “Gradual rate hikes remain appropriate in the near term. The Monetary Policy is increasingly dependent on how outlook evolves as some tailwinds fading, including cooler global growth, while financial conditions have tightened in recent months. The US economic momentum is strong, as shown by the labor market and job gains well above the level that absorbs new entrants. The US wages picked up over last year and inflation is encouraging. There are good reasons to expect solid US growth in 2019, but fading fiscal stimulus likely in 2020”.
Meanwhile, Fed’s Bullard reiterated his calls to leave rates unchanged in December in view of bond yield flattening/inversion and wait for January to take decision for further hikes. Bullard is the first Fed member to publicly call for Fed hold in December and also called himself the most-dovish FOMC member and argued that modernized Taylor Rule suggests keeping rates on hold.
Bullard also said: “There is no purpose in Fed inverting yield curve to preempt inflation and the narrowing yield curve is a signal from markets that the Fed has gone too far as it (the Fed) is now a little bit hawkish based on where it needs to be to control inflation”.
Bullard even added: “The US rates are at neutral or above neutral today and the economic growth is slowing toward potential. Although I do not expect recession days or weeks after yield inversion (10s2s), it will be a tough year for the Fed as the economy slows”.
On Friday, the St. Louis Fed president Bullard, a known dove repeated his call for the Fed to pause its current cycle of interest rate increases, saying the central bank may already be restricting the economy. Bullard said: “The current level of the policy rate is about right. The market-based measures of expected inflation have recently dropped, and that by my calculations the current policy rate set by the Fed is already at a slightly restrictive level”.
As per Bullard, the so-called neutral rate is just around +2% against Fed’s current nominal rate at +2.25% and neutral range of +2.50% to +3.50%. As the US core PCE recently dropped to +1.8%, as per Bullard, the Fed rate is already above neutral and thus the Fed should not go the Dec hike as planned.
In addition, Bullard also thinks that the US low unemployment, at 3.7%, is not likely to generate inflation pressure in a world where “there is very little feedback (relationship) at all” between labor markets and inflation. Indeed, Bullard argued, information from inflation-adjusted securities markets (TIPS) show markets do not expect the Fed to make its 2% inflation target over time. Bullard said: “Financial markets do not expect the Fed to attain its stated inflation target”.
Bullard, a non-voting FOMC policy maker this year will be a voting FOMC member from 2019. But his ultra-dovish comments has not affected the USD on Friday as the Fed is nor targeting a symmetrical inflation target of 2%; i.e. a range of US core PCE inflation at +1.75% to +2.25%, and not just 2% as Bullard is indicating.
For the Fed, the real rate of interest (neutral) range is +0.50% to +1.50%; i.e. the range of neutral/nominal rate is +2.50% to +3.50% assuming the US core PCE inflation stays around +2.00% on an average. After the likely hike in December by Fed to +2.50%, the Fed will be in neutral monetary policy mode from current tightening and the Fed is expected to hike further in H1/H2 (June and Dec’19) twice in 2019 to go for the median neutral rate of +3.00%. The above Fed stance will change only if the US core PCE inflation decisively goes beyond this range; i.e. above (+2.25%) or below (+1.75%) for a couple of months (in a sustainable manner).
Apart from Goldilocks US NFP report on Friday, in other economic data front on Friday, the UM consumer sentiment for December flashed at unchanged at 97.5, buy higher than the expectation of 97.1. The UM consumer expectations for December dropped to 86.1 from prior 88.1, lower than expectations of 88.3. The UM current conditions for December surged to 115.2 from 112.3, higher than expectations of 113.1.
Overall, the US Consumers were a little more optimistic on current economic conditions and the sentiment remains steady in the peak holiday/shopping season amid real wage growth, falling fuel/energy costs and Trump tax cuts (fiscal stimulus), but a bit more pessimistic and not so much confident about the future on future job and wage prospects. As per the University of Michigan (UM): “Rising prices and interest rates will not cause substantial cutbacks in spending as long as job and income growth remain strong”.
On early Monday, USDJPY is currently trading around 112.67, almost flat (-0.02%), but well-off the earlier Asian session low of 112.24 on terrible Q3 GDP contraction from Japan at -2.5% from prior -1.2%, much higher than the expectations of -1.9% contraction on yearly basis.
The USD came under stress earlier Monday and DOW future also slumped on hawkish anti-China trade comments from the USTR Lighthizer. He said on the weekend that the 90-days are a “hard deadline” for China trade deal.
The current USTR Lighthizer, a known China hawk said: “The March 1 is a hard deadline as far as I am concerned; new tariffs will be imposed otherwise. When I talk to the president of the United States, he is not talking about going beyond March and thus March 1 is the deadline. The way this is set up is that at the end of 90-days, these tariffs will be raised”.
Lighthizer comments are in contrast to Kudlow’s comments on Friday, as he said: “Trump may give China more than 90-days if China trade talks go well and Chinese car tariffs will come down rapidly. Huawei doesn't have to spill into trade talks with China and the US has been warning Huawei on sanctions violation for quite some months”.
But another known China hawk Navarro said the US would move forward with raising tariffs when he was asked on Friday whether the US would walk away if China trade talks not resolved in 90-days. Navarro also said we don't do day-to-day policy to move financial markets in reference to the ongoing market turmoil on the China trade issues.
The USD was also under stress after the White House CEA/NEC Kudlow said “slower inflation could cause Fed to slow hikes and the Fed might not raise interest rates in December due to softer inflation data--I'm reading all these Fed officials are now saying that the inflation rate is actually coming down a bit--sounds to me like the Fed's spokespeople are signaling maybe one more rate hike in December, later this month, and maybe no more for quite some time. Or maybe they won't move this month”.
Technical view: USDJPY
Technically, whatever may be the narrative, USDJPY now has to sustain over 113.35 for a further rally to 113.85/114.25*-114.55/114.75* and 115.50*/115.85-116.25/117.50 in the near term (under bullish case scenario).
On the flip side, sustaining below 113.10-113.00, USDJPY could further fall to 112.20*/111.80-111.30/110.90 and 110.55/110.30-109.70*/109.20 in the near term (under bear case scenario).