- Moody’s downgrades Japan ahead of election
- Reserve Bank of Australia holds rate at 2.5%
- Commodities recover as lower prices drove bargain buys
On Sunday the Swiss National Bank (SNB) got a reprieve with the rejection of the gold referendum and the Reserve Bank of Australia (RBA) decided to hold its benchmark rate at 2.50% today. The statement from the RBA mentions China is growing inline with projections but its is Europe and Japan which bring deflation risks. The Australian central bank finds the current policy adequate and the statement was peppered with dovish comments but overall was neutral. Central bank focus will move to Canada and later to the European Central Bank (ECB) on Thursday. In Japan Shinzo Abe was dealt a heavy blow when ratings agency Moody’s downgraded Japan ahead of the election campaign for the snap elections he called.
Abenomics Downgraded Ahead of Elections
Rating agency Moody’s downgraded Japan’s rating to A1 over uncertainty on its plans to reduce its deficit and boost growth. The statement from Moody’s highlighted the key drivers of the downgrade:
- Heightened uncertainty over the achievability of fiscal deficit reduction goals;
- Uncertainty over the timing and effectiveness of growth enhancing policy measures, against a background of deflationary pressures; and
- In consequence, increased risk of rising JGB yields and reduced debt affordability over the medium term.
The rating agency goes on to talk about the strength of the Japanese economy so in effect the downgrade is squarely aimed at Abenomics. Shinzo Abe will go into snap elections just as Moody’s has increased the political capital of opposition parties. It won’t be enough to tip the scale against Abe, but the timing could have been better as it came one day before the start of the campaign. The USD/JPY broke through the 119 Yen level only to give back some of the gains as questioning the effectiveness of Abenomics and its currency weakening tools only serve to appreciate the JPY. Rating downgrades don’t historically mean a lower currency as investors tend to look at the overall performance of the economy and the developing price action. Economic data out of Japan has been positive of late, but the shadow of the April sales tax hike continues to haunt the economy. There were various warning at the time that while it was the fiscally responsible option, it could drain the momentum kickstarted by the three arrows of Abenomics.
The silver lining for the Abe government is the faster than expected recovery after the recession could be not as deep as first thought. Capital spending in Japan continues to rise as more corporations improve their confidence in the recovery. Wage increases continue to trickle through the economy as Abe keeps meeting with business lobbies with that goal in mind.
RBA Holds Rate But Calls Global Growth Moderate
The AUD/USD gained slightly after the statement from the RBA was published. The tone was less dovish than expected. The central bank continues to mention the housing risk with lower rates, but does not seem ready to raise rates to curb the market. On the other hand lowering rates could give the economy a boost pushing internal consumption and gaining a competitive edge with a lower currency. The Aussie continues to trade above 0.85 versus the USD awaiting more central bank rate statements this week. Only the ECB seems to have something new to say, but it all depends if it manages to bypass its German editors. The U.S. non-farm payrolls (NFP) at the end of the week could push the AUD further down as the optimism keeps rising on the recovery of American employment. The private payrolls released on Wednesday will be a test before the NFP is released.
Commodities between a Strong Dollar and Slowing China
Commodities bounced back from heavy losses after touching multi year lows. Higher inventories and lower expected demand have taken their toll as energy, metals and food are having a year to forget. Brent fell lower than $70 only to get back above after price conscious buyers sensed an opportunity to stock up on energy. Gold saw big jump on Monday with over 3 percent gains. The USD has gotten a boost after the Fed first announced and then followed through on the end of its quantitative easing program in the Fall spelling lower prices for USD denominated commodities. Friday’s NFP can validate the view of the Fed on the state of the U.S. economy and drive commodities lower, specially if demand from China, Europe and Japan continues to be softer.