JPY Bears Retreat
After a shaky opening to the Eurozone fixed income markets, risk assets recovered some lost ground in Europe, with the euro rallying some 80 pips back up to 1.3240. The BTP 10-year auction results were reasonably strong though less demand was seen for the 5-year bond. Despite the Bank of Japan surprising the markets and easing more than expectations, USDJPY grinded lower. Shirakawa did not help in the press conference by noting that ‘recklessly easing without an eye on the time lag of policy effect could risk destabilizing the economy’. These comments are unlikely to impress the market, in our view. In the meeting itself, the bank delivered incremental easing on several fronts. First, the portion of the asset purchase program reserved for actual asset purchases was increased by JPY 10 trn, and virtually all of this will be dedicated to JGB purchases. Second, even more significantly, the bank released itself from a self-imposed restriction on the JGB tenors it is allowed to buy under the asset purchase program. Previously only JGBs with a residual maturity of two years or less were eligible, but the bank has now extended that limit to three years. Third, the bank had intended to complete its asset purchase program by year-end, but it has now extended it for another 6 months – out to June 2013. This does not signal a slow-down in the pace of purchases of course, as the purchase target has also increased commensurately. Confusion reigned in the immediate aftermath of the announcement and USDJPY sold off after it initially appeared the asset purchase target had only been increased by JPY 5 trn. The source of the confusion arose because the bank redirected JPY 5 trn it had made available for 6m loans, and instead earmarked that cash for additional asset purchases, taking the total to JPY 10 trn. However, the net increase in available funding was only JPY 5 trn. We note however that demand for 6m BoJ cash had been underwhelming, and so by redirecting this largely unused pool of cash towards asset purchases instead, the bank has made better use of its firepower. USDJPY soon climbed when the details sunk in, but it eventually gave back all gains. Elsewhere, late during the US session, S&P downgraded Spain by two notches from A to BBB+, outlook negative. The agency warned that the country’s ‘budget trajectory will likely deteriorate’ and more national support may be needed for the banking sector. In the US session, the advance Q1 GDP release is due, while BoC Governor Carney is due to be on the wires.
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