In the markets: What to watch this week

Japan’s ‘helicopter money’

An area of debate during this stressful period of low interest rates, low inflation and low growth has been around the alternative to quantitative easing (QE): ‘helicopter money’.

The Bank of Japan (BOJ) comes closest to this radical concept (originally coined by Milton Friedman in 1969), even though the legalities of such a policy remain uncertain. By pushing negative interest rates up to zero, and combining this with expansive monetary policy, is effectively how Japan is coming close to this concept.

At its last meeting on 21 September the BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates, pledging to pin benchmark 10-year yields around zero.

The central bank strengthened its forward guidance by vowing to continue expanding the monetary base until inflation is stable above the 2% target – committing to an overshoot of consumer-price gains in an effort to revive inflation expectations. The BOJ’s next policy meeting takes place between 31 October and 1 November.

South Africa’s rand

Production figures due this week are likely to continue with a downward trend as the strength of the rand against major currencies has made it cheaper for importers to sell foreign goods.

Manufacturing production figures are expected tomorrow, while mining production is due to be released on Thursday.

The South African economy remains very exposed to the strength of the greenback as commodities are priced in dollars – our biggest export market is the US.

Also, South African markets are highly dependent on the exchange rate as the TOP40 major constituents are highly dependent on foreign operations.

The US’s rates

Federal Open Market Committee (FOMC) meeting minutes are due for mid-week release, with many expecting to see the rhetoric continue in the direction of hiking rates in December. Labour data remains a meaningful factor for Fed decisions.

The EU’s inflation

The European Central Bank (ECB) intends to push on with its aggressive stimulus policy of negative interest rates and massive bond buying until it is happy with the outlook for eurozone inflation, two of its most senior officials said last Thursday.

The ECB has spent over a trillion dollars buying bonds in an effort to boost inflation, but this is still just above zero and is not expected to reach the ECB's target of almost 2% for at least two years.

German ZEW Economic Sentiment – a survey of about 275 German institutional investors requested to rate the outlook of the next 6 months – is a harbinger for reaction to the latest ECB developments.

Other economic announcements this week:

Monday

• German Balance of Trade
• Euro Area Eurogroup Meetings
• US Fed Labor Market Conditions Index

Tuesday

• Japan Eco Watchers Survey

Wednesday

• Euro Area Industrial Production
• US Crude Oil inventories

Thursday

• China Trade Balance
• Bank of Japan Monthly Report
• German Inflation
• US Unemployment and Trade

Friday

• China Inflation
• US Retail Sales, PPI, Michigan Consumer Sentiment and Fed Chair Janet Yellen speaks

Giacomo Bonavera is head of foreign exchange trading at Capilis Asset Managers. Click here to visit the firm’s website.