Central bank caution prevails as BoJ disappoints

July 29, 2016

Investors were left empty handed during trading on Friday following the Bank of Japan’s expansion of monetary stimulus which fell below market expectations. The central bank decided to expand the amount of exchange traded funds purchased from 3.3 to 6 trillion Yen while leaving main interest rates unchanged despite the economy’s vulnerable state.  This decision was shocking as the nation continues to be exposed to downside risks while domestic economic data such as GDP and inflation have displayed signs of weakness. With risk aversion from the global instability encouraging investors to purchase the safe-haven Yen, Japan could be in store for further punishment moving forward. Although BoJ Governor Haruhiko Kuroda has repeatedly pledged to do whatever it takes to reach the golden 2% inflation target, today’s disappointment suggests that central bank caution has prevailed, potentially sabotaging his efforts.

While markets reacted accordingly to the BoJ decision, the disappointment should be no surprise as the persistent uncertainty in the financial markets has created an era of central bank caution. Major central banks remain on edge and have entered a mode of standby which can be seen in the previous monetary decisions of the ECB and BoE. There are speculations over the Bank of England cutting UK rates in the next policy meeting and if such materializes then this could break the chain of central bank inaction.

The Yen appreciated in a ferocious fashion and could be poised for further gains as a combination of risk aversion and diminishing optimism over the BoJ taking any action invites buyers to attack. From a technical standpoint, the USDJPY is turning bearish on the daily timeframe and the breakdown below 104.00 could open a path towards 101.50.

WTI Crude cuts below $41

WTI Crude oil has entered a slippery decline with prices smashing into fresh three month lows below $41 as the elevated concerns over the excessive oversupply of oil in the markets simply encouraged sellers to install a round of selling. This week’s unexpected build in both crude and gasoline inventories rekindled fears over the excessive supply while the returning supply from the previous disruptions have sabotaged any real recovery in value. Oil is firmly bearish and could be destined to trade towards $40 as the mixture of supply concerns and speculation that demand may be waning attracts sellers to attack. From a technical standpoint, the downside momentum is strong with prices magnetized to the $40 target.

Commodity spotlight – Gold

Gold was placed on a rough roller coaster ride this week as a combination of US rate hike expectations, risk aversion, and Dollar strength sent prices oscillating between gains and losses. Although expectations are still live over the Fed raising US rates in 2016, the precious metal continues to display resilience with prices clipping $1345 on Thursday. Risk aversion is the engine which has kept Gold buoyed and could propel the metal higher when concerns heighten over the current unstable economic landscape. It should be kept in mind that uncertainty is still a recurrent theme in the global markets while central bank caution has kept investors on edge. This metal may be poised for further gains in the future when investors scatter away from riskier assets towards safe-haven investments. From a technical standpoint, a breakout above $1345 could open a path towards $1370.

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