Bank of Japan remains steady

* Data roundup
* BOJ underwhelms
* Dollar sitting on losses
* Waiting for GDP

And Now, Today’s A Pfennig For Your Thoughts.

Good Day. And welcome to Friday morning. The weekend is finally upon us, which happened to be a week that was dominated by both the Fed and the Bank of Japan. Since they are both behind us at this point, sights are firmly set on next week’s Bank of England meeting. If I’m not mistaken, I believe Chuck is back in the saddle on Monday so it sounds like we should be reverting back to our regularly scheduled programming. But first, let’s see what Frank has in store for us today.

“From 36,000 feet: It’s Thursday afternoon for me and I’m winging my way towards Charlotte. It’s a little funny my reasons for saying that. No complaints but when we write for our monthly publications it takes a little time for the pieces to work their way through the system. Over the past couple years I have tried to say something somewhere in the article that indicates when it was written so readers have a clear picture of what was going on at that precise time. Over the past year or so this has become more and more important as event shock has accelerated. I laughed in June when I waited to finish one article until after the Fed Meeting, only to have Brexit come out of the blue one week later and change the whole equation – at least for a week. Right now I worry about commentary making any sense when written the day before – there are just some many seemingly random things occurring.

When we arrive in North Carolina, we’ll board another flight to France. Reading a little deeper into my European publications to try and catch the mood, the title of an article in Spiegel jumps out at me – “Apocalypse Now” ( “Has the world gone mad?” begins the article. Maybe it does feel that way for a lot of us, and they sure echo the sentiment I noted above. Investors and market watchers like ourselves are demonstrating clearly that these many security occurrences along with a confusing litany of economic news has roiled the markets. Purchasing government debt, or for that matter any bonds, at yields below zero suggests that large chunks of money simply doesn’t have confidence in the certainty of their outlook; better to buy a known loss of a small amount than be surprised when news announcements drive a price or prices down.

One of the key things that appears to have shifted is the strong dollar trend that we had seen over the past several years. True, the US dollar remains pretty high, but since the top of the year many (but not all) of the currencies have risen against the US dollar. It seems that even when there are events, it isn’t just the US dollar that gets the love anymore. What are the implications? As I told the sold-out crowd at the Sprott Natural Conference in Vancouver this may well be the beginning of another decline in the US dollar over the medium term. And people who own currency as part of a diversified portfolio will benefit if it continues.”

Thanks Frank and I appreciate all of the help. And now let’s cut over to Dane Moody and get his thoughts on yesterday’s US economic data.

“The jobs report came and went on Thursday causing barely a ripple in the markets. The figures fell essentially right in line with expectations, so traders largely ignored them. The weekly reading of initial jobless claims for last week came in at 266k vs. an expected 260k. The four week moving average of these initial claims, which helps sort through the volatility and one-off events that can skew a one-week reading, fell to 256k last week, which is the lowest level since April and trending in the right direction. Though the report didn’t make much of an impact in the markets, the recent readings suggest a continually solidifying labor market.

This morning – probably right about the time this letter is hitting your inbox – we’ll see the US GDP report for the 2nd quarter, and the experts are calling for a significant improvement on the first quarter’s figure. The consensus, according to a Reuters poll of economists, is for a reading of 2.6% growth in the quarter for the US economy, which would dwarf the awful first quarter number of 1.1% growth.

As I mentioned yesterday, we’ll also get some consumer sentiment numbers from the University of Michigan monthly release. The forecast for these reports expect a slight uptick from last month’s numbers, signaling that the US consumer continues to grow a bit more confident about the state of the economy.

Next week brings a fully stocked data cupboard here in the US. On Tuesday, we get the July figures on car sales, personal income and personal spending. Wednesday offers up the ADP national employment number as an appetizer for Friday’s Job Jamboree and all the useful data that comes with it. We’ll have to see what story the headline numbers tell about the US economy and if they hold up under scrutiny when we look under the hood.”

Thanks again Dane and you did a great job with your contributions this week. As Frank mentioned, the dollar still remains strong by recent historical standards, but its upward scope has been fairly limited this year. If we look at the dollar index, it has remained in the 94 to 98 range and hasn’t been able to break back into the 100 handle, which it had briefly flirted with at the end of last year. With all of the vulnerabilities in Europe and China, I think the fact that the dollar hasn’t broken through those resistance levels further supports the idea that we could be top heavy on the dollar.

The currency market was actually pretty quiet during the US trading session yesterday as most currencies remained in neutral ahead of the Bank of Japan meeting. There has been a lot of back and forth as to what action, if any, the Japanese central bank will decide to take so the yen has been caught right in the middle. Are they going to increase the scope of their asset purchase program? Are they going to cut rates even further into negative territory? Will we see helicopter money? These questions and more have been on the minds of traders and has been the root cause of the whipsaw like movements over the recent past.

As I was wrapping things up yesterday evening, The rand and the Brazilian real were the best and worst performing currencies on the day as they returned 0.80% and -0.90% respectively. The dollar index had another day in the red but it actually firmed up as the day progressed as the markets didn’t want to get too far ahead of the BOJ decision. At the end of the day, most currencies didn’t stray very far and had fractional moves. Precious metals took a breather but they were at least able to retain most of their gains from Wednesday. Oil just can’t get any traction and was in serious danger of losing the $41 handle.

As I came in this morning and turned on the currency screens I didn’t even need to check the headlines to figure out that the Bank of Japan didn’t go all crazy with additional stimulus measures. The dollar index is down about 0.50% and trying to hold the 96 handle as the yen is trading near 103 and a 2% gain so far this morning after the markets were pricing in a more aggressive approach. Boiling it all down, the BOJ decided to double the purchase of ETFs but decided to leave everything else alone, which included keeping interest rates on hold. They did say, however, a comprehensive assessment will take place at their next meeting in September so the light remains illuminated for increased action down the road. Other than that, not much else to mention besides waiting around for the US GDP number.

That’s it for today, so until next time, have a great day!

Currencies today 7/29/16. American Style: A$ .7517, kiwi .7114, C$ .7595, euro 1.1111, sterling 1.3175, Swiss $1.0270 European Style: rand 14.1507, krone 8.5481, SEK 8.6061, forint 280.71, zloty 3.9264, koruna 24.326, RUB 66.9960, yen 103.27, sing 1.3504, HKD 7.7570, INR 66.9305, China 6.6511, pesos 18.9331, BRL 3.2815, Dollar Index 96.206, Oil $40.83, 10-year 1.52%, Silver $20.05, Platinum $1,125.00, Palladium $690.25, and Gold $1,334.50.

Mike Meyer
Vice President
EverBank World Markets