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PIG TODAY-A BoJ's 'Bazooka' Unlikely But USD/JPY Set To Recover Towards 108 - BNPP

We continue to expect a modest recovery in the USD versus the JPY near term, largely due to our expectation of an increase in US yields in response to a more hawkish message from the US Federal Reserve and a 25bp September rate hike. Widening US-Japanese front-end rate differentials have made hedging of USD risk increasingly expensive for yen-based investors which means that Japanese domestic investors may start to reduce currency hedging on JPY portfolio outflows.

We continue to forecast a rise in USDJPY to 108 at the year end and therefore think current valuations represent a good level for USD buyers to initiate hedges.

We think the likelihood of the Bank of Japan (BoJ) delivering ‘bazooka’ style easing at its upcoming meeting on 21 September is low. Our economists think further rate cuts are unlikely, due to strong opposition from financial institutions and legislators. A further increase in exchange-traded-fund purchases also seems unlikely after the recent doubling of the volume of BoJ purchases, while it is very difficult for the BoJ to increase its pace of Japanese government bond buying as the market sees limits on this policy ahead.

Our economists think the most likely scenario is that the BoJ will change its monetary base target from an annual JPY 80trn to a range ‒ possibly JPY 70-90trn ‒ and simultaneously announce that buying operations will be conducted flexibly within this range, to ensure long-term yields remain low.

Source: efxnews.com

We continue to expect a modest recovery in the USD versus the JPY near term, largely due to our expectation of an increase in US yields in response to a more hawkish message from the US Federal Reserve and a 25bp September rate hike. Widening US-Japanese front-end rate differentials have made hedging of USD risk increasingly expensive for yen-based investors which means that Japanese domestic investors may start to reduce currency hedging on JPY portfolio outflows.

We continue to forecast a rise in USDJPY to 108 at the year end and therefore think current valuations represent a good level for USD buyers to initiate hedges.

We think the likelihood of the Bank of Japan (BoJ) delivering ‘bazooka’ style easing at its upcoming meeting on 21 September is low. Our economists think further rate cuts are unlikely, due to strong opposition from financial institutions and legislators. A further increase in exchange-traded-fund purchases also seems unlikely after the recent doubling of the volume of BoJ purchases, while it is very difficult for the BoJ to increase its pace of Japanese government bond buying as the market sees limits on this policy ahead.

Our economists think the most likely scenario is that the BoJ will change its monetary base target from an annual JPY 80trn to a range ‒ possibly JPY 70-90trn ‒ and simultaneously announce that buying operations will be conducted flexibly within this range, to ensure long-term yields remain low.

Source: efxnews.com

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