Forex Institutional Research: Deutsche Bank FX Daily
Key quotes from the Deutsche Bank report:
The BoJ’s decision to introduce NIRP on 29 Jan has given it the additional policy option of tiered interest rate cuts as well as keeping its QQE measures. In addition, the appointment of two policy board members who support QQE to replace outgoing members in March and June will likely make it easier for the Kuroda-led BoJ to implement policy. It will likely become more difficult for the market to gauge successive responses at each BoJ meeting.
The majority of market participants, including us, expect no more easing at the BoJ meeting on 15 Mar. The Bank likely needs to assess the effects on the NIRP. It appears that many of the roughly 10% of market participants who anticipate additional easing expect easing not through rate reductions, but with increased ETF and REIT purchases.
Meanwhile, most investors expect the BoJ to ease further in the next several months, with around equal numbers looking for a move in April, June, or July. It may be difficult to narrow the focus to reading USD/JPY rates, but we see no need for nervousness. The main engine driving up the USD/JPY is US economic strength, and without this, BoJ policy should have virtually no sustained impact in pushing up the USD/JPY rate
The BoJ’s QQE1 in April 2013 and QQE2 in 2014 rapidly pushed up the USD/JPY because the US economy was strong at the time. The 29 January decision to introduce NIRP failed to support the USD/JPY amid US economic slowdown, and conversely triggered a decline. As seen in the DB Nowcast Index (Figures 1 and 2), US economic momentum has dropped to the threshold of recession, weighing heavily on the USD/JPY
Rather than BoJ policy, we should likely first look at risk-off factors, especially the status of US economic slowdown. However, in the short-term, if strong US indicators spark expectations of a rate hike, EM’s and resource markets are likely to become unstable, and a rising USD/JPY could be unsustainable even under risk-on. It will likely take several months at shortest for confidence in the US economy to recovery to the point that Fed’s rate hike appears inevitable.
The USD/JPY is likely to remain top-heavy tomorrow if the BoJ does not ease further. In the unlikely event that the BoJ does ease further through ETF purchases and the like, and the USD/JPY rebounds to above 114, it will be a sellers’ market for Japan hedgers. We are concerned that disappointment with limited recovery in the USD/JPY, and a repeat of the previous meeting’s USD/JPY downturn could greatly decrease the market’s respect for BoJ policy
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