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20 May 2015
BoJ should not play a major role on USDJPY - BofA
FXStreet (Bali) - According to the Rates and Currencies Research Team at Bank of America Merrill Lynch, notes that over the near term, BoJ's Monetary Policy Meetings should not play a major role on USDJPY.
Key Quotes
"We continue to expect monetary policy to drive USDJPY. While the timing of the Fed's first rate hike has become more uncertain as a result of weaker-than- expected US economic data recently, a variety of questions also surround the BoJ's policy: (1) if and when it will implement additional easing, (2) available easing options, (3) the sustainability of QQE, and (4) the market's reaction to a potential failure of the BoJ's buying operations. While the sustainability of QQE and potential of failed operations are long-term risks# questions over additional easing are more pressing medium term. The April Outlook report attached an easing bias through highlighting the downside risk to the BoJ’s inflation outlook, and leaves open the option of additional easing in the future."
"Over the near term, we do not expect the BoJ's Monetary Policy Meetings to have a major impact on the USDJPY. Given the current state of the economy and inflation, our economists expect monetary policy to stay on hold. Last October's decision to expand QQE was very close to being rejected with a five-to-four vote. In addition, the level of skepticism in the market over the sustainability of QQE– though still low–is gradually inching up, along with the debate over its side effects."
"Accordingly, if Kuroda is to propose additional easing, he is likely to spend time in carefully forming consensus, and dovish shifts could be seen in the meeting minutes and speeches by policy board members (which we have not seen). Overall, (1) the strength/weakness of economic data and (2) how they impact the BoJ's tone should be key for the FX market. We have not seen any major data that would alter the BoJ’s thinking. There was a media report last week that suggested the option of cutting the interest on excess reserve is not permanently off the table according to “people familiar with the discussions”. While we also think the option can arise in a crisis situation, we view the probability is low at the moment for reasons we discussed in our recent report. Taken all together, we view the upcoming policy meeting as neutral for the USDJPY."
Key Quotes
"We continue to expect monetary policy to drive USDJPY. While the timing of the Fed's first rate hike has become more uncertain as a result of weaker-than- expected US economic data recently, a variety of questions also surround the BoJ's policy: (1) if and when it will implement additional easing, (2) available easing options, (3) the sustainability of QQE, and (4) the market's reaction to a potential failure of the BoJ's buying operations. While the sustainability of QQE and potential of failed operations are long-term risks# questions over additional easing are more pressing medium term. The April Outlook report attached an easing bias through highlighting the downside risk to the BoJ’s inflation outlook, and leaves open the option of additional easing in the future."
"Over the near term, we do not expect the BoJ's Monetary Policy Meetings to have a major impact on the USDJPY. Given the current state of the economy and inflation, our economists expect monetary policy to stay on hold. Last October's decision to expand QQE was very close to being rejected with a five-to-four vote. In addition, the level of skepticism in the market over the sustainability of QQE– though still low–is gradually inching up, along with the debate over its side effects."
"Accordingly, if Kuroda is to propose additional easing, he is likely to spend time in carefully forming consensus, and dovish shifts could be seen in the meeting minutes and speeches by policy board members (which we have not seen). Overall, (1) the strength/weakness of economic data and (2) how they impact the BoJ's tone should be key for the FX market. We have not seen any major data that would alter the BoJ’s thinking. There was a media report last week that suggested the option of cutting the interest on excess reserve is not permanently off the table according to “people familiar with the discussions”. While we also think the option can arise in a crisis situation, we view the probability is low at the moment for reasons we discussed in our recent report. Taken all together, we view the upcoming policy meeting as neutral for the USDJPY."