– Bank of Japan extends asset purchases, but USDJPY may still head lower over the weeks ahead
The Bank of Japan eased monetary policy on Wednesday. The action by the BoJ has been slightly more aggressive than expectations with the asset buying program having been extended by JPY10tr to 80tr. The BoJ will purchase JPY5tr of JGB’s. The recent rise in USDJPY from last week’s low of 77.20 suggests that the market had priced a high likelihood of easing. However, the increase in the size of the asset purchase program was more than expected and ahead of the meeting it was uncertain whether the BoJ would extend its purchases of JGBs. USDJPY has therefore moved higher on the release by 60pips to 79.20. Going forward, however, we expect broad USD weakness to gradually push USDJPY lower. Further action from the BoJ is likely, with both easing and actual intervention, but we expect these to provide only temporary spikes higher in the cross which should be bought in to. For now, we favour fading the rally in USDJPY as an opportunity to position for JPY strength against the USD. Over the past year USDJPY has only managed to sustain a move higher when US yields have had a sustained move higher. With Fed action to maintain low US yields, upward pressure on USDJPY is likely to be capped.
– July TICS data reveals increased safe-haven demand for US Treasuries
US Treasury TICS data reveals that international purchases of long-term US securities increased in July to $67 billion. This total was an increase from June and is fully consistent with the peak of eurozone structural stress when demand for safehaven assets likely peaked. Indeed, the largest contributor to the total came from net foreign buying of US Treasuries at $50 billion for the month. July also represented the trough in US 10-year yields below 1.4%. Yields have backed up since, breaking above 1.8% this week. Our 3-month moving average measure of net long-term portfolio flows shows an increase over the past few months but the US is still struggling to fund its current account deficit through long-term portfolio inflows (see chart).It will be interesting to watch this data series to assess how inflows respond to the Fed’s initiation of QE3 in September. The USD fell consistently during QE1 and QE2 but the trend in net portfolio inflows was different during each regime. Net portfolio inflows rose during QE1 but fell during QE2, suggesting that this data series provides less insight to the USD than in years past.
– Recent dip in NOKSEK provides an opportunity to buy
The SEK has strengthened against the EUR and NOK despite the Riksbank minutes confirming the dovish stance of the Executive Board. The minutes support our economist’s view that the Riksbank may cut policy rate further this year. We continue to favour long NOKSEK with the ratio of 2-year swap rates for NOKSEK to indicating substantial short-term upside to the cross. In the current FX Weekly we reiterate our long NOKSEK trade recommendation targeting 1.1700.
BNP Paribas