BoJ 'Helicopter Money' on the radar

It seems the Bank of Japan (BoJ) are not in a position to conduct ‘Helicopter Money’, or what could also be known as money-financed fiscal programs.

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Source: Bloomberg

The interesting thing about the spike lower in IN_USDJPY (to ¥105.42) on the back of headlines that ‘there is no need or possibility for helicopter money’, was that these comments were effectively just a recording of something BoJ governor said in June. The fact we’ve only seen a modest recovery in the pair suggests traders see very little appetite for this uber unconventional policy change and we should see the Nikkei open on the back foot today.

Keep in mind that there are legal bearings around using the BoJ to finance government budgets. However, this can change by obtaining a majority in parliament, but the fact the market is having a more open discussion about public financing using the BoJ means it’s certainly on the radar. In actuality, there is scope for the BoJ to avoid directly affecting the government budget and going direct to the end user. By obtaining the green light from Shinzo Abe the BoJ can print and provide cash handouts to the public and to various corporates that they feel would use the money to push economics. In reality, comments about potential ‘Helicopter Money’ in Japan should not be taken too seriously yet, but it  can be the new equity market ‘put’, where by if current initiatives don’t work and the Nikkei tumbles we will have a more intense discussion about this practise. However, prior to this traders should be focusing more intently on next Fridays BoJ meeting.

It would not be a shock in any way if we also hear of the ¥20 trillion fiscal package the market has been anticipating in conjunction with easing of monetary policy. So, expect bold action here or we are going to see another monster rally in the JPY and the Nikkei will get taken to the woodshed…such are the elevated expectations.

We have heard from Mario Draghi and the European Central Bank overnight and as expected the central bank stands ready to act and September is the meeting where we are highly likely to see further action. EUR/USD has effectively done very little and seems to have found a sweet spot with a range of $1.1150 to $1.1000 seen since the UK referendum. It’s difficult to see the short-term catalyst here, but one suspects this comes from next week’s July FOMC meeting and while inflation expectations are still way too low and the yield curve far too flat, US economic data is improving. One just has to look at the Citigroup US economic surprise index (this measures the actual economic data print relative to the consensus), which is now the highest since late 2014. If the Fed are going to lift rates this year then the July meeting could be an important platform for their communication guidance.

Interestingly, we have seen a 10% increase in the US volatility index and although the level of the ‘VIX’ is still remarkably low we are starting to see some increased portfolio hedging - One to watch. The S&P 500 has closed below its ultra-short-term five day moving average, for the first time since 6 July. In fact the meagre 0.35% loss on the index was the worst day since 5 July, such are the limited daily ranges. Next week all eyes on earnings from key note companies such as Freeport, Caterpillar, Apple, Facebook, Amazon and Exxon.

The modest weakness in the S&P 500 shouldn’t trouble the ASX 200 too greatly and our call is for the index to unwind at 5505. BHP’s ADR is matching up 7c, with CBA ADR +26c. Oil prices are 3.3% lower than the ASX 200 close, so expect underperformance today from energy names.

The backdrop is thus set for a fairly low volume day and this is the sort of conditions where the brokers will tend to take extended lunchbreaks and catch up with clients. It would take something very punchy in the news to stop the market from printing back-to-back weekly rallies, with a close below 5429 needed to avoid this. Aussie investors will also be firmly focusing on the start of earnings season, with GUD Holdings and RMD set to report next week.

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