INDIA: RBI Publish Discussion Paper Reviewing Basic Tenets of MonPol Framework
The RBI has published a discussion paper which proposes the following questions for feedback:
- Whether headline inflation or core inflation would best guide the conduct of monetary policy, given evolving relative dynamics of food and core inflation and the continuing high weight of food in the CPI basket?
- Whether the 4 per cent inflation target continues to remain optimal for balancing growth with stability in a fast growing, large emerging economy like India?
- Should the tolerance band around the target be revised in any way including whether the tolerance band be narrowed or widened or fully done away with?
- Should the target inflation level be removed, and only a range be maintained within the overall ambit of maintaining flexibility without undermining credibility?
The RBI note that "this review gives us an opportunity to revisit some of the basic tenets of the framework to nudge the economy towards further improved macroeconomic outcomes in the best interest of all stakeholders [...] we intend to hear from all stake holders and collate a pool of ideas before deciding on the final recommendations. This Discussion Paper intends to begin this process"
- See the full document here.
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FOREX: USDJPY Gravitates Lower Post Election, Trade Deal Optimism Noted
- A partial recovery overnight for USDJPY was swiftly shrugged off and the pair has resumed a steady downtrend since the European open on Tuesday. Price action echoes that seen on Monday in the aftermath of the upper house election in Japan, as PM Iishiba affirmed he would remain in office despite his party losing its majority.
- The extension lower for core yields has assisted this dynamic of yen outperformance, as both the trans-Atlantic tariff tiff and Bessent’s more optimistic tone for Powell’s future provide a supportive tone for treasuries. Furthermore, Bessent’s mention of Japan talks going “very well” and that the election may be the impetus to getting a deal done will have also provided tailwinds for the yen. His comments follow Japan’s chief trade negotiator meeting with the US Commerce Secretary on Monday ahead of the looming August 01 deadline.
- USDJPY has traded through initial support at 146.92 (Jul 16 low), printing session lows of 146.51 at typing. Short-term pivot support to monitor next is 145.85, the 50-day EMA.
- Some analysts had cited the substantial rally in USDJPY as overshooting the shift in fundamentals, and the subsequent cleaner positioning could be exacerbating this week’s swift reversal lower. Below the 50-day EMA, attention will be on 144.23, the July 7 low.
EQUITIES: Stocks Drop on Little News; Currency, Bond Markets More Resilient
- Equities have reversed hard since the cash equity open, with the e-mini S&P sliding to a new daily low on heavy volumes - no headlines here of note to drive the move, and the move looks generally equity-led, with bond and currency markets generally holding firm. Volumes really picked up on the break of overnight lows - helping trigger the ~15 point drop that's already started to partially reverse.
USDJPY TECHS: Correction Extends
- RES 4: 151.21 High Mar 28
- RES 3: 150.49 High Apr 2
- RES 2: 149.38 50.0% retracement of the Jan 10 - Apr 22 bear leg
- RES 1: 149.18 High Jul 16
- PRICE: 146.51 @ 14:54 BST Jul 22
- SUP 1: 146.63/60 20-day EMA / intraday low
- SUP 2: 145.85 50-day EMA
- SUP 3: 144.23 Low Jul 7
- SUP 4: 142.68 Low Jul 1 and a key support
A bull cycle in USDJPY remains in place despite the latest pullback - a correction. Recent strength has resulted in a breach of resistance at 148.03, the Jun 23 high, and a move through key resistance at 148.65, the May 12 high. The break strengthens the bullish theme and opens 149.38, a Fibonacci retracement. On the downside, short-term pivot support to monitor is 145.85, the 50-day EMA.
