The BoJ more than delivered with larger than expected asset purchases and unexpected measures. The USD/JPY ripped higher in response.
Shock and awe
The BoJ matched and exceeded expectations with the measures announced at its meeting in late Asian/early European hours. These are the major points of the plan :
- JGB purchase will move all the way out the yield curve – although the average maturity will move out to 7 years from the current 3. The amount of bond purchases will be approximately JPY 7 trillion a month (expectations were closer to 5)
- Overall, to approximately double the monetary base inside of two years. Current monetary base is around JPY 135 trillion, and the rate of expansion will be 60-70 trillion/year. This is the measure that is getting the most attention, as the BoJ is hoping to reach its 2% inflation target inside of 2 years.
- There is a commitment to continue easing until the 2% inflation target is achieved. More monetary mayhem can be expected if inflation rates don’t pick up within a few months.
- Suspension of the “banknote rule” which theoretically capped the BoJ balance sheet, relative to the amount of banknotes in circulation
The massive move to blast the Japanese economy with an avalanche of liquidity, is certainly having the effect the BoJ was hoping for. At the time of writing, the USD/JPY had responded with 250 pips worth of rallying and the Nikkei has jumped close to 4% from its opening overnight. The question for currency traders is whether this ignites a wider move in asset markets, and if the Japanese yen will weaken after the initial kneejerk – in other words, will these measures merely serve to weaken the JPY and fail to improve the Japanese economy in the longer run, and increase doubts on the efficacy of this monetary policy approach?
The endless irony is that as the BoJ promises inflation, Japanese bonds are moving to record low yields in anticipation of the blitz of BoJ purchases. The 10-year JGB’s have dropped to 44 basis points overnight, after trading close to 60 bps to start this week, and over 100 bps a year ago. If inflation does return, then a JGB is the last thing an investor wants to own – but for now, it’s all about “the flow”. Negative interest rates are clearly coming to Japan as the great confiscation of Japanese savings now begins. How will Japanese savers respond? For now, let’s see where the kneejerk reaction takes us.
Elsewhere
TheAUD struggled a little overnight, perhaps as the main focus of JPY selling was via USD/JPY buying, keeping the USD well supported in the crosses. Although obscured by BoJ anticipation, there were interesting developments Down Under. Retail Sales were very strong, and Prime Minister Gillard made prominent mention of the Australian dollar’s strength, claiming that Australia needs to adjust to this “feature of the economic landscape”. Australian yields at the front of the curve were virtually unchanged. That 1.0500 level in AUD/USD is proving tough to crack; if we hold into the close in the low 1.0400’s range, the bears will begin to find a technical argument or two for further downside developments.
North Korea took the extreme step of not allowing South Korean workers to come to work in the small joint industrial complex in North Korea, which is an important source of hard currency for the country. Today, the country gave all employees and companies notice to leave by April 10. The Korean won weakened to new lows for the year.
Mind the gap in Sweden’s Services PMI for March – that is an ugly point indeed. The USD/SEK is finally starting to get some upside momentum.
Looking ahead
As if the BoJ wasn’t enough, the ECB and BoE are both up tomorrow. My baseline expectation is for the ECB to lay the groundwork for an interest rate cut at the next meeting, but I recognize a greater likelihood than consensus suggests that they will go ahead and cut today. Draghi will come out in full “bluff mode”. The press conference will be interesting, as we watch how Draghi responds to being asked to compare and contrast ECB policy with the BoJ measures just announced. I’m looking for the EUR/USD lower, but can’t rule out a squeeze within the range first. The focus on the JPY makes trading EUR/USD difficult in this environment.
As for the BoE, I lean towards no move on asset purchases based on the aggressive GBP weakening that unfolded earlier this year. There wer signs of concern in the government, but there is a reasonable chance that they'll bump the asset purchase target 25 billion pounds higher today. The EUR/GBP has survived the 0.8440 support challenge thus far. If it cuts today, the rally could extend, while GBP/USD 1.50 is likely to fall again right away.
France bond auction today at 0850 GMT.
Tomorrow is U.S. employment data report day. The most interesting scenario is an exceptionally weak number, as this works against the grain of the USD/JPY blowout rally today.
Stay careful out there today; identify the risks of two-way volatility in the JPY crosses while the market sifts through the implications.
Economic Data Highlights
- Australia Mar. AiG Performance of Services Index out at 49.6 vs. 48.5 in Feb.
- Australia Feb. Building Approvals out at +3.1% MoM and +12.8% YoY vs. +2.5%/+14.3% expected, respectively and vs. +10.0% YoY in Jan.
- Australia Feb. Retail Sales out at +1.3% MoM vs. +0.3% expected
- Sweden Mar. PMI Services out at 47.3 vs. 54.2 expected and 54.6 in Feb.
- Spain Mar. Services PMI (0715)
- Italy Mar. Services PMI (0745)
- France Mar. Final Services PMI (0750)
- Germany Mar. Final Services PMI (0755)
- Euro Zone Mar. Final Services PMI (0800)
- Norway Feb. Retail Sales (0800)
- UK Mar. Services PMI (0830)
- Euro Zone Feb. PPI (0900)
- UK BoE Announces Rates/Asset Purchase Target (1100)
- Euro Zone ECB Announces Rates (1145)
- US Weekly Initial Jobless Claims (1230)
- UF Fed’s Evans and Lockhart to Speak (1245)
- US Weekly Bloomberg Consumer Comfort Survey (1345)