The decision making will be “pretty difficult” as their
fellow colleagues from FOMC will be deciding on exit strategy couple of hours
later the same day. Actually, we believe they already know about the FOMC
decision at this point.
But let’s focus on a
few facts about BoJ first:
-
Expecting a comprehensive
assessment of monetary policy, its tools and effects, economic activity –
positive words, not really pointing to negative effects
-
Confirming
that negative rates and asset purchases helped to lower the funding
costs for corporates, not caring much about banks
-
…but all
of that is very questionable for banks as their profit margins got squeezed
or turned negative (latest call on BoJ officials from one of biggest Japanese
banks to take into account negative effects of low or negative rates). Also the
pension funds and savings suffer what is not offset by
rising consumption of aging nation as Japanese are. From this perspective, the
Japanese companies are more worried about pension obligations than effects of borrowing
costs on their business.
-
Actually the aging and heavily indebted economy is becoming less and less flexible and responsive to any policy actions to ignite the growth and
inflation. Japan as a country will have to face very tough structural reforms
and need to globalize the corporate sector more in the near future.
-
While looking at the asset purchases of stocks, corporate bonds, ETFs…etc., we are not
sure whether BoJ, already in some cases a significant shareholder of some
companies, is analysing its steps, influencing the board decisions…etc. – what
is really insane just as a fact
itself that central bank is a
shareholder…!!! Aren’t we
witnessing currently a global nationalisation…?
-
Inflation
still well below 2% target with long
term expectations being very weak too (don’t blame oil only)
-
Economy
still not able to grow at desirable pace
but some positive signs are here
-
The yield
curve has started to steepen
recently – a sign of markets expecting something from BoJ (for example more
flexibility with bond purchases, reducing of purchase on longer end or
tapering…etc.). Bear also in mind that any spike up in JPY may be short lived
as higher long term yields are usually negative for JPY.
- Opinion
split between BoJ officials, as
well as officials and government is becoming more visible (more negative rates
vs bond purchases vs none of them).
Our expectations:
-
Overall we
expect BoJ to be very bold about its decisions but still may disappoint the markets
as Kuroda’s team will keep some room
for a follow up action after FOMC
decision. In other words they will come up with a bit more flexibility, few
tweaks of QE, eligible assets (local or foreign bonds), maturities...etc. and as
a reaction the USDJPY will be falling towards 100, then reaching the recent lows
around 99, and if there is no action over coming weeks/months it can even move
lower to 95 or so.
-
Further rate
cut is possible, especially as an attempt
to widen the yield spreads with US Treasuries once the JPY starts to
strengthen again and also to move more from JGB purchases in order to steepen
the yield curve at long end, thus giving the banks a chance to increase margins
(deposits vs loans).
On the upside we see for USDJPY the resistance
levels at 102.50, 103.50, 105.00 and 107.50. From technical perspective closing
on weekly chart above 104.50/105.00 levels opens the sky as a limit for USDJPY.
-
Next meeting is on Oct 31-Nov 1 but the action (for example intervention) can take place even before that meeting
especially, in case of significant JPY strengthening to USDJPY 100 or below
level
-
Improving
predictability and communication/guidance
would bring lots of clarity to markets. May be they are not sure what to do or
are split and that’s why they do not communicate properly (Fed officials come
to my mind with this point as well)
-
As per CFTC
commitments of traders report as of Sep 13, 2016 the speculators were long 57k
JPY futures contracts vs 54k
previous week what may tell us that the market has either doubts about BoJ actions or is not expecting the move
-
In case of a combination of no action from BoJ and Fed we may refocus ourselves
on US presidential debates and elections
on Nov 8, as the range bound trading will continue once the dust settles.
Good luck Champs!
Mr Hawk
DISCLAIMER: This material was created for informational
purposes only and represents the Land of Trading team’s view of the past and current
economic and capital market environment. It is not an investment advice and
should not be viewed that way at all, and the creators of this material cannot
be held liable for any potential losses resulting from trading, where despite
this disclaimer someone would consider this material as an investment advice.
All rights reserved ©2016. Contact: landoftradingATgmailDOTcom
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