ASIA MORNING: Kuroda And Lowe To Speak

BoJ Governor Kuroda is due to make a speech at 3.30pm AEST today. Markets will be closely monitoring the speech having seen the BoJ leave its reactive function unchanged in the prior Thursday's September central bank decision, while also, make comments that it would "re-examine economic and price developments at the next monetary policy meeting [October]". Though the implied probability of an October -10bps rate cut is still relatively low at 26%, look for intensified speculation around a rate cut as Kuroda drops hints on the BoJ's forward stance. 

With a significant portion of Japanese rates currently submerged (short-term, medium-term yields) in negative territory, further rate cuts by the BoJ in its short-term policy rate and 10y yield target, seem unlikely, given they would further exacerbate concerns over negative interest income for major pension and life insurance investors. It's far more likely that any change to monetary policy will manifest in a wider bandwidth of the 10y yield target or the amount/duration of Japan's asset purchasing program. I'd focus more on hints coming out surrounding the latter. 

If USDJPY depreciates significantly (Yen appreciation) thereby putting negative pressure on major exports and wage inflation, then it might be reasonable to expect the BoJ to demonstrate stronger convictions around additional easing through rate cutting. I don't think we're there yet with USDJPY trading only slightly below 108. 

An evening speech by RBA Governor Philip Lowe at the Armidale Business Chamber Dinner is pencilled in for 7.55-8.05pm AEST.

In line with rhetoric on the street, the speech could all but confirm an October rate cut citing the sluggish labour numbers and persistently low inflation that affronts the domestic Australian economy. A large focus or some commentary by Lowe around last week's job figures may be the biggest hint yet of an October rate cut. 

Historically, with downturns in unemployment having been strongly correlated with cuts to the cash target rate, and the RBA's monetary policy statement highlighting "subdued inflation", markets having been steadily repricing expectations forward for a rate cut in October. However, as it stands, the implied probability of an Oct rate cut is 79% which likely suggests that it'll take some strong language on Lowe's behalf to see markets bake in an even higher chance of a rate cut. 

Given the speech is in early Europe and markets are cautious on overnight PMI ramifications, look for bearish AUD pressure against the JPY. AUDJPY down. ASX 200 to open weaker on iron ore and lower commod prices. 

Overnight, risk sentiment soured after a string of Eurozone manufacturing and service PMIs printed well below expectations. Throughout, investors were largely focussed on major misses in German manufacturing (41.4 vs 44.6 expected) and service PMIs (52.5 vs 54.3 expected), though soft French PMIs also impacted. Collectively, the weak PMIs saw EURUSD, GBPUSD and USDJPY all finish strongly down as risk-off flows and aggressive repricing of an ECB cut in December transpired.

In Asia today, we catch Japan manufacturing flash PMIs at 10.30am AEST forecast at 49.5, a slight improvement on August which printed at 49.3. However, with a print below 50, it still indicates contractionary conditions within Japanese manufacturing, whilst also maintaining a string of weak JPY mfg PMIs seen since the beginning of 2019. On balance, the data is likely to compound the low growth and uncertain trade outlook narrative observed across the broad deterioration of global mfg and serv PMIs seen overnight. 

USDJPY on a weak print could test minor intra-week support at 107.4 and September 11 lows at 107.2. The move lower in USDJPY should lead Nikkei lower. 


JPY manufacturing flash PMIs have been in contractionary territory since 2019 start. Source: Eikon