– USDJPY two-way price action to continue into G20
The BOJ announcement proved to be a non-event today. BOJ kept asset purchase fund at JPY 76tn and left its overnight call rate unchanged at 0-0.1% with no fresh easing measures announced. The notable was that a board member Miyao proposed keeping a zero rate policy until 2% inflation is insight, however, his proposal was voted down 8-1. The economic assessment was revised higher – economy “appears to have stopped weakening” – reflecting the improvement seen in industrial output and export orders. But this morning’s release of Japan’s preliminary Q4 GDP was weak – economy unexpectedly contracted by a further 0.1% QoQ in Q3 against forecast following a revised -1.0% in Q3. On a annual basis; the economy also shrank by -0.4% vs forecasts on a 0.5% gain and after contracting by a revised larger 3.8% fall in Q3. This suggests that PM Abe will need to press further to fight against deflation, with more pressure likely to fall on the BOJ as the upper house election in July draws near. In addition, it is essential that GDP print improves in 2013 as the government had promised that they will only raise the consumer tax in 2014 when GDP goes above 2%. All eyes will be on the new Governor candidacy likely to be finalized before the end of the month. Ex-BOJ Deputy governor (one of the BOJ governor candidates) said that USDJPY at 95 is appropriate from a trade perspective, while USDJPY of 90-100 is a return to equilibrium. He suggested that correction of strong yen is essential to achieve BOJ’s 2% target while policies should include buying longer-term JGBs, risker assets. He also appears supportive for a revision of BOJ law. For now, headline risk from the G20 is likely to dominate, keeping a number of market participants on the side-lines. G20 Host Russia’s Deputy Finance Minister said that JPY was mildly overvalued, and JPY weakening move so far was not seen distorting trade –comments that appear inconsistent with Russian Central Bank Governor in January who said he was concerned about currency wars. There is scope for the G20 to add to the G7 statement, but we suspect the core of the message – no targeting of exchange rates – will remain intact. This implies that USDJPY should spend some time in the 92.50-94.50 range for now, with slight upside bias given the sustained upward pressure on the UST yields.
– BoE Inflation report feeds into GBP bearishness
Bank of England inflation report yesterday saw the 2Y-ahead inflation forecast raised as expected, with inflation expected to remain above the central bank’s 2% tolerance level for the forecast horizon. However, the BoE also emphasised that this would not translate into tightening policy action anytime soon. UK inflation breakevens moved higher on the release, and GBP has continued to remain under selling pressure, a continuation of the relation seen over the past few months. Markets also noted FX comments by Governor Mervyn King who said that the weaker pound was necessary for the rebalancing of the economy. Overall, this is unlikely to reverse the EURGBP’s upside momentum. For GBPUSD the break of 1.5600 is a bearish signal although our STEER model suggests the pair is ‘cheap’ with its fair value at 1.5930.
– NOKSEK remains a sell after Riksbank
The Riksbank left rates unchanged and sounded less dovish, refraining from tweaking their repo-rate profile from December. Given that there was a sizeable number of participants looking for a rate cut (9/22 Bloomberg poll), we think the SEK rally can continue. Furthermore Governor Ingves sounded relaxed on FX, saying he was happy with the current level of SEK. NOKSEK has broken below the 1.1514 low seen last week. As we have been pointing out, relative data surprise indicators (which have correlated well with NOKSEK) continue to flag more downside below the 1.1400 level.
BNP Paribas