USDJPY Pushes Lower
As expected, Japan’s lower house passed the bill proposing that the sales tax doubles from 5% to 10% by 2015. However, 57 DPJ members voted against it, which marks a major dissent inside the ruling DPJ party. USDJPY initially rallied, given the political uncertainty surrounding the dissent but party power-broker Ozawa said he will do best to revive the party while remaining part of it. The removal of any immediate risk of a party split pushed USDJPY lower towards 79.00 as the US walked in. Elsewhere, risk appetite was stable and the markets took some comfort from the release of draft documents which have revealed that the next steps towards a fiscal union will be discussed at Thursday’s summit. This draft was earlier reported by the Financial Times, though we note that the scope for major progress on policy is limited and leaders will simply discuss a range of possibilities rather than confirming any actual policy steps. EU Commissioner Barrosso said people need to have realistic expectations as to what can be achieved at the summit. The Commission’s report on integration should lay out the building blocks for the future, but that integration steps may require Treaty changes. Members of the BoE gave their testimony to the Treasury Select Committee, providing an overview of their thoughts on the UK’s monetary policy. Governor King said that the ECTR should provide the UK banking system with reassurance and reported that banks have pre-positioned large amounts of collateral with the BoE’s discount window facility. King also added that the BoE has not rejected the possibility of cutting the bank rate further. However, he said to do so would make smaller building societies vulnerable. As such the arguments against going below 0.50% still apply. King also noted that a small cut in the bank rate would not have much impact on the economy; bond purchases can still provide a much larger stimulus. This remains our base case for the BoE.
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UBS Investment Bank