USDJPY takes a dip on BoJ inaction
USDJPY dipped below 98.00 as the Bank of Japan opted to keep policy unchanged, including no extension of the tenor of the BOJ’s fixed lending program. It left open the option of making policy adjustments as needed, and will continue easing (targeting Yen 60-70trn annual rise in the monetary base) until the 2% inflation target is sustainable. We are of the opinion that the sell-off in USDJPY will not be particularly pronounced since a lot of the weaker longs have already been cleared out during last week’s sell-off. Monday’s price action also highlighted the pair’s sensitivity to the US side of the equation. USDJPY initially rallied to intraday highs after the S&P revised the US credit rating outlook from negative to stable. Although we have argued in the past that credit rating has not been a major driver of the USD (if anything, the 2011 downgrade was a dollar-positive as risk assets sold off), it sits well with the market’s expectation of relative US economic outperformance and is probably mildly USDsupportive at this stage. USDJPY came off its Monday highs on comments from the Fed’s Bullard who said lower inflation warranted continued asset purchases. Our longer-term view is that JPY will remain the main currency of choice for funding carry trades, with the details of latest monthly capital flows data from the MoF hinting at capital outflows that have in the past been associated with JPY-funded carry activity (see chart). We continue to target USDJPY at 108 by year-end.
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BNP Paribas