Analysts at Nordea Markets consider it a good idea to accumulate some JPY if the Fed softens further up, but suggest that the big obstacle for the long JPY bet is though potentially still Bank of Japan.
Key Quotes
“Due to the yield-curve-control regime, it may prove difficult for Bank of Japan to exit the current strategy without having to print a truckload of new electronic JPY liquidity.”
“A rational investor would prefer to sell the bond holdings to Bank of Japan ahead of gradual increases in the YCC level (e.g. from 0.1% to 0.2%).”
“If the market sniffs out steps towards further normalisation of the YCC-policy, it could hence lead to an acceleration of the purchase tempo. Probably the opposite of what Bank of Japan in such case would strive for. The increased purchasing tempo after the July move towards a more volatile 10yr point on the yield curve, could be one of the reasons for the weakness seen in JPY since.”
“The best way to come about this problem is via a sudden and early abandonment of the yield-curve-control, akin to when SNB abandoned the EUR/CHF floor. This is though probably not a question for the short-run but only a latent JPY positive tail scenario.”
“The negative pressure on the JPY from the hot printing press in BoJ is though abating again. As long as BoJ stays credible and warns of unlimited purchases, we tend to think that the purchase tempo can continue to decelerate. A JPY positive scenario.”
“The global central bank liquidity drought (slowing purchases or outright balance sheet wind downs elsewhere) is in general favouring a JPY positive outlook, as i) less global liquidity is negative for risky assets, ii) BoJ has been THE fiercest importer of inflation via asset purchases.”
“Month-end rebalancing though suggests a weak JPY in the coming week, but JPY is certainly one of the currencies that we consider as a bet of the year 2019.”
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