BoJ Watching
Risk remained under pressure amid holiday-thinned activity overnight, with US equities dealing with the post-payrolls blues, USTs sporting a firmer profile, and USDJPY holding below 82. All eyes are now on today’s BoJ policy decision, as easing hopes have been fanned by a number of recent events – the ‘underwhelming’ Tankan, the soft US payrolls print, the Upper House’s clear desire for a dovish Board candidate, the Noda-Shirakawa meeting, and yesterday’s order by the Prime Minister to set up a new panel to examine the macro outlook that will include the BoJ Governor as an “observer”. This magnifies the risk of a bullish knee-jerk yen reaction to a ‘no change’ verdict (our central view), but any impact should be limited by what we see as greater odds of action on April 27, in line with today’s press headlines. The extra time would allow the BoJ to take into account the results of the FOMC’s deliberations on April 24-25 and justify any policy easing with its updated Outlook Report. While there may be less scope for the BoJ to surprise markets now than in February, we believe that further BoJ easing in the face of a steady Fed would still boast the potential to put the yen on the defensive. The BoJ has a number of options at its disposal: (i) an extension of the APP from the end of 2012 to June 2013 or longer; (ii) an expansion of the APP by at least another JPY5 trn, concentrated in the JGB component; (iii) a removal of the self-imposed guideline that currently limits JGB purchases via the APP to those issues with two years left to maturity or less; (iv) an expansion of regular ‘rinban’ operations from the current JPY1.8 trn monthly pace; and (v) an upward revision in the inflation goal from 1% to 2%. Options (iv) and (v) would have the biggest negative effect on the yen, but are less likely than the first three at this stage. We maintain any further USDJPY pullback towards 80.00-80.50 ahead of the April 27 BoJ meeting would provide attractive re-entry points for dip buyers, targeting a rebound towards 85 on a three-month horizon against the backdrop of an unchanged Fed policy stance. Beyond the BoJ, markets will be closely watching the SNB’s defence of the EURCHF floor, not to mention Spanish yields for any signs of stress.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank