BoJ vs Fed
The consolidative tone remained intact overnight in the absence of any fresh drivers, with USDJPY holding above 82 and EURUSD still sitting below 1.32. All eyes will now be on the policy decisions from the BoJ and then the Fed later today. No new changes to the BoJ’s Asset Purchase Programme (APP) are expected after the Y10 trn boost delivered on February 14, with the TOPIX/yen moving in the desired direction since then and the BoJ still boasting over JPY 14 trn of potential JGB buying power within the existing JPY 19 trn limit. Doves would argue that this would be an ideal opportunity for the BoJ to reinforce last month’s easing effort, but that may be asking too much now. What the BoJ is more likely to concede at this stage is a one-year extension of the special JPY 3.5 trn facility designed to encourage financial institutions to lend to growth industries, which is due to end this month. Having already been flagged in local press reports, such a gesture should have little FX impact, but this in no way implies that the BoJ has run out of ideas. Political pressure for further easing remains strong (keep an eye on the impending appointments of two new Board members, with the terms of Seiji Nakamura and Hidetoshi Kamezaki set to expire on April 4). Indeed, UBS still sees scope for an expansion, extension and/or amendment of the APP next month, perhaps in conjunction with the publication of the Outlook Report on April 27. Our US economics team expects today’s FOMC meeting will reveal a ‘wait-and-see’ posture, reinforced by the improvement in the labour market, with little new information about policymakers’ thought processes or the possibility and composition of any further easing. Our baseline scenario assumes the Fed will stay on hold well into next year, ultimately giving way to a rate hike in H2 2013 – well before the BoJ. This divergence underpins our bullish call on USDJPY towards 85 on a three-month horizon and 90 in 2013.
Over the past 24 hours, USDJPY traded between 82.11-82.57, with EURUSD at 1.3079-1.3159.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank