JPY: Trading The BoJ – Views From Major Banks

The following are brief expectations for the BoJ July meeting as compiled from the related research reports of 11 major banks.

Overall, the consensus expects the BoJ to keep its policy and QQ targets unchanged.

On the JPY front, the consensus doesn’t seem to price the outcome of the meeting as a big marker mover but seems to prefer promoting buying EUR/JPY on dips. On that specific long EUR/JPY trade, TD Research argues that  127.70 offers the first level of decent support to refresh long exposure, while Credit Agricole Research prefers going long via options than via spot.

BTMU Research: The BoJ will announce its latest monetary policy decision and will also provide updated forecasts on real GDP and inflation. In a world of shifting monetary stances by central banks globally, it is very likely that the BoJ will continue to do its upmost to remain outside of this clique! So the message is clear. The BoJ will remain separate from other central banks given the weaker inflation dynamic. That should ensure the yen remains on a weaker footing. The BoJ NEER is down 3.1% over the past month and we see potential for further weakness over the short-term. 

CIBC Research: If there’s an outlier among major central banks, it’s Japan’s, and for good reason—the stubborn lack of an inflation lift-off. The lack of an inflation contribution to nominal GDP growth will make it difficult for Japan to get out from under its high government debt/GDP ratio…Still, even the BoJ will want to ease off its current tack if the yen gets weak enough, if only to keep it out of the way of any US accusations of currency manipulation. As a result, we expect the yen to reach a weak point of about 116 later this year, before a gradual recovery in 2018.

Morgan Stanley Research: USDJPY remains a ‘buy the dip’. Japan’s weekly security flow data confirmed continued bond-related outflows which should persist for now as there are no signs of the BoJ moderating its yield curve management. Improving US financial conditions may see the Fed paying attention again to the capital misallocation risk.

Danske Research: We expect the Bank of Japan (BoJ) to maintain its ‘QQE with yield curve control’ policy unchanged at its monetary policy meeting ending on 20 July. It is widely expected that the BoJ will keep its monetary policy unchanged, especially after it earlier this month demonstrated its strong commitment to yield curve control by announcing an unlimited fixed-rate purchase of 10Y JGBs. The announcement should not have any significant impact on price actions.

SocGen Research: The biggest threat to USD/JPY bulls is that 10year real yields continue to climb in Japan – a risk highlighted by the prospect of the BOJ downgrading its inflation forecast at this week’s meeting….The story is a bit different in EUR/JPY because German and Japanese inflation expectations are more closely aligned,“ SocGen clarifies. ”…With solid growth prospects, while talk of ECB tapering is set to persist, that makes long EUR/JPY seem like a more attractive trade than long USD/JPY.

Credit Agricole Research: We expect no changes to the BoJ’s policy parameters at this week’s meeting and looks for the IOER rate to be left at -0.1% and the YCC 10Y JGB target at 0%. While the BoJ will slightly revise up its GDP forecasts by 10-20bp in its Economic Outlook Report, it will lower its inflation forecasts from 1.4% to approximately 1% for FY17 and from 1.7% to 1.5% for FY18, in order to reflect recent weak inflation readings. 

Braclays Research: The BoJ, which is seen as the least-likely G4 central bank to signal a hawkish pivot despite its closing output gap, is also widely expected to hold its policy. In its quarterly Outlook Report, the BoJ is reportedly looking to revise down its inflation forecast reflecting low inflation trend. JPY has depreciated sharply since late June, due to the unexpected hawkish pivot by other central banks and the BoJ’s commitment to YCC via recent fixed-rate operations. Although the monetary policy divergence story could support USDJPY around 110-115 for longer than we expected, further upside is limited, as we argue in the Overview section. To the contrary, further reversal of recent hawkishness by other central banks, and cautiousness of Japanese investors toward foreign investment, could drive JPY appreciation.

UniCredit Research: The BoJ meeting tonight is unlikely to offer any surprises, but after USD-JPY has fallen nearly 1.5% from peaks at around 114 hit just on 10 July, we cannot exclude some modest profit taking on the outcome announcement and probably still-dovish tones by Mr. Kuroda in his press conference. That being said, we remain bearish on the medium-term prospects for USD-JPY and recommend selling this pair into rallies, if any (at around the mid-July peak of 113.58).

BofAML Research: The BoJ is likely to keep its rates and QE targets unchanged at its 20 July MPM, in line with consensus expectations. Yield upturns accompanied by increased volatility could occur some time in the future even with BoJ’s large JGB purchases. JPY is likely to watch politics rather than monetary policy for now.

NAB Research: We are not expecting the BoJ to offer any indications that it is wavering on its current commitment to the 0% Yield Curve Control (YCC) policy. The BoJ might again push its forecast for when it expects to achieve the 2% inflation target.  If we’re right on both counts, the Yen should weaken somewhat out of the BoJ.

TD Research: We think, long EUR/JPY offers an attractive/cleaner leg to express idiosyncratic JPY risks. We think that 127.70 offers the first level of decent support to refresh long exposure in the event the ECB/Draghi disappoints, with 125.50/80 as very durable pivot.

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