If uncertainty about the Fed’s decision is significant, the clouds surrounding the BOJ are huge. As officials in Tokyo conclude their assessment of their QQE program, basically anything can happen. Nevertheless, here are opinions saying that pressure on USD/JPY will likely continue, regardless of the outcome:
Here is their view, courtesy of eFXnews:
Sep BoJ: Will The BoJ Wave The White Flag On Its Inflation Target? – Credit Agricole
When it comes to the BoJ and according to Bloomberg, the market consensus is for no change in either of the BoJ’s policy instruments. Despite the central bank conducting a comprehensive review of monetary policy, only 12 of 40 surveyed economists expect an increase in the BoJ’s asset purchases and only 14 expect a cut to the policy rate. The FX options market is expecting more fireworks, however, with the breakeven on owning USD/JPY vol for tomorrow’s date at 1.5%.
No action by the BoJ tomorrow would likely be a disappointment for investors. It could look dangerously like the BoJ is ‘waving the white flag’ on trying to reach its inflation target.
The impact on the USD/JPY would likely be negative as the Nikkei would likely head lower and our research shows that the main driver of the USD/JPY post BoJ meetings is the reaction in the Nikkei. Outside of the adjusting the policy rate and asset purchases, the BoJ could also change the wording on its inflation goal. Currently, the Board aims to get headline CPI inflation to 2% at the earliest possible time. There are some analysts calling for adjustment to the time horizon for reaching the goal or even the goal itself such as changing it to core inflation. Any “watering down” of the inflation goal would be viewed negatively by the market, in our view.
Sep BoJ: USD/JPY Set To Fall Even If BoJ Increases JGB Purchase – Citi
What to expect from the Comprehensive review according to Citi Economics:
– It will reiterate the importance of anchoring inflation expectations at around 2% while attributing recent declines in inflation expectations to lower oil prices. However, the Comprehensive Assessment seems quite unlikely to make a compelling argument on why the current policy framework can lift inflation expectations.
– In the Comprehensive Assessment, policymakers will likely conclude that the benefits of the negative interest rate policy (NIRP) will exceed the costs, such as an ongoing impact on financial institutions’ profits and a potential impact on financial intermediation, at least for the time being.
– It seems unlikely that the Comprehensive Assessment of monetary policy will narrow the significant perception gap between market participants and BoJ policymakers. As such, the BoJ’s communication with the financial markets will probably continue to be very challenging even after the Comprehensive Assessment.
– We expect the BoJ to leave the total purchase amount of JGBs for now, while showing an intention to introduce more flexibility to the target for the average maturities of the BoJ’s JGB purchase operations.
Overall, Citi Economics thinks the BoJ will ease further at the January 2017 meeting, at the same time as making a big reduction to the FY3/18 outlook for prices. Specifically, we think the bank will cut the policy rate from the current -10bps to -20bps (and at the same time pursue greater flexibility in JGB purchases). However, we expect this to have minimal economic impact.
——————————
CitiFX Strategist Osamu Takashima thinks the event risk of this week’s BoJ meeting for USDJPY will be on the downside.Given not crowded JPY shorts, it won’t fall below the recent low of around 99 this month. However, there is the risk the pairing could then test the next critical level of around 95 before year-end.
He says, “Based on a survey that the investor sales in Citi Tokyo conducted with Japanese investors (more than half was equity investors) last week, about 48% expects the BoJ to take action this week while 45% doesn’t think so. Most of them believe the action could be an IOER cut and/or modifying JGB purchases (shorten the average duration and/or shift to more flexible purchase like the band target of JPY 70-90tn). On the other hand, those who expect the increase in the asset purchase are less than around 15%. So, the QQE reinforcement could be a surprise for the markets, but if the BoJ were to actually increase JGB purchase, currently JPY 80tn annually, it can deepen the market’s concern that the Bank’s purchase could face the limit and the unintended technical tapering could happen sooner than presently thought. Therefore, we think the JGB purchase increase is not a good way for the BoJ to take so as to cast away the markets’ skepticism for its capability. Even in this case, USDJPY will eventually break the 99-100 support and decline towards 95.
Sep BoJ: BoJ To Disappoint But USD/JPY Won’t Significantly Break Below 100 – Danske
All eyes will be on the comprehensive assessment due to be conducted by the Bank of Japan (BoJ) at the 20-21 September monetary policy meeting for any indications of a change in the monetary policy framework and/or additional monetary easing. Governor Haruhiko Kuroda has been clear in saying that monetary policy tightening will not be discussed in relation to the assessment, but we do not expect the BoJ to ease monetary policy.
However, we expect it to adjust its policy framework by abandoning its calendar-based communications on when it expects to reach the 2% target and instead pursue 2% inflation ‘at the earliest possible stage‘. Moreover, we expect the BoJ to maintain its negative interest rate policy and keep the door open for additional rate cuts in the future while adopting a more flexible approach to its quantitative target for JGB purchases.
In our main scenario, we expect the BoJ to disappoint relative to market pricing at the 21 September meeting, suggesting that USD/JPY is likely to trade lower in the very near term.
Given the market’s low expectations for further Fed rate hikes, short-term valuations and positioning, we expect JPY appreciation pressure to lose momentum, and in the absence of a sharp deterioration in risk sentiment and/or substantial declines in crude oil prices, we do not expect USD/JPY to break significantly below 100.
We target 101 in 1M and 102 in 3M. On a 3-12M horizon, we see USD/JPY in rage of 100- 105. On the one side, the prospect of a monetary policy surprise (either from the BoJ or the Fed) is low and while underlying support for JPY stemming from fundamental flows is likely to remain intact, we see the effects diminishing as the yen is no longer undervalued. Moreover, we expect the market to continue to price in a probability of a BoJ rate cut in the future, which will remain a supporting factor for the cross. We target USD/JPY at 104 in 6-12M.
For lots more FX trades from major banks, sign up to eFXplus
By signing up to eFXplus via the link above, you are directly supporting Forex Crunch.
Share
