The wait is over and JPY traders globally will be tweaking positions as we head into the afternoon and the long-awaited BoJ meeting. Local news sources (the Nikkei) have suggested the bank will increase its Asset Purchase programme (APP) by ‘only’ ¥1.2 trillion a month, which is far short of the ¥2.0 trillion a month the market has been expecting and is positioned for. It certainly would not fall under the realms of the ‘regime change’ that the Deputy Governor recently spoke about.
Of course there are other things that the bank needs to detail and the most likely thing (we think) will be the bringing forward of the open-ended purchases to May from January 2014; a merger of the APP and older Rinban programme; and a lengthening of duration of the current APP to bring down yields across the curve.
Clearly all of the these scenarios have been well and truly priced into USD/JPY at currently levels, and while we note Haruhiko Kuroda is perhaps more in tune with market expectations than many other central bankers ,there are a few announcements the bank could make which are not fully factored into the JPY.
For the BoJ to really push the JPY lower, the bank could look to cut the IOER (interest earned on excess reserves), although the chances are slim as it lowers the incentives for local institutions to take part in fund supply operations. It could also increase its purchases of ETFs or REITS, while of course smacking the market with an announcement that it plans to increase the APP by ¥25 trillion would certainly surprise and show its intent to hit the 2% inflation target within two years.
As said, we are aware that Haruhiko Kuroda is very in-tune with the FX market, having previously worked as Vice Finance Minister for international affairs . His recent statement ‘we need to follow through on what we say and deliver bold monetary easing so as not to betray market expectations’ could be key. It is also worthy of note that Mr Kuroda has a Lower House hearing tomorrow, so bold actions that provoke JPY weakening could get him a few pats on the back.
We still feel that any descent pull backs in USD/JPY that potentially materialise from a ‘sell the fact’ type scenario could become a buying opportunity over the longer term, and we will focus on the top of the daily Ichimoku cloud at 92.24 as near-term support, although Tuesday’s low of 92.57 will need to be breached. Of course, while US yields will need to push higher again to put a bid in the USD, it is also apparent that the USD has firmly become a pro-cyclical investment asset, as opposed to pure ‘risk on, risk off’ play, which it adopted after the Lehman collapse.
In the short term, the market is still positioned for further JPY weakening over the long term, however some of the heat has come out of the pair, especially after last night’s ADP payrolls and services ISM, where the pace of expansion in the employment sub-component fell strongly. It is also worth highlighting the triple divergence in the RSIs on the US dollar index (DXY).
