BoJ In The Spotlight
Price action in USDJPY may have been subdued in Asia overnight – as befits Payrolls Friday – but the subject of BoJ easing featured prominently in investors’ minds. A failed BoJ Rinban operation was a sure sign that some investors are now positioning for a possible cut to the interest rate that the BoJ pays on reserves. This sounds unlikely to us, but it is natural that speculation of this nature should arise after the ECB’s decision to do the same yesterday. The failed auction indicates that JGB investors would rather hold onto their short dated bonds for another week, in the hope of selling at better levels after next week’s BoJ meeting. Otherwise there was little follow-through in Asia after yesterday’s policy easing by the ECB, BoE and PBoC. The Bank of England and ECB served up £50bn in QE and a 25bp cut in the main refinancing rate to 0.75%, respectively – decisions which were largely expected. However, the PBoC cut its one-year lending rate by 31bp to 6.00%, and the ECB lowered its deposit rate to zero. These decisions were not entirely expected and the additional stimulus will surely be welcomed by the market as a sign that central banks globally are taking action to avoid a new downturn in global growth. Nonetheless, the euro was hit hard by the ‘failure’ of the ECB to deliver additional liquidity stimulus on the back of the rate cut, as Draghi was clearly not willing to reveal too much, merely indicating that the Council did not discuss any non-standard measures today. After the initial bounce higher, the tone in the equity markets soured. If anything, the stimulus delivered could be portrayed as a sign of escalating economic pressures globally, in particular in China, where over a month’s worth of fiscal and policy measures appeared to have delivered very little return. Friday’s non-farm payrolls release in the US will have a stronger bearing on sentiment. Better than expected US jobs-related data (June ADP employment up 176k; initial jobless claims down 14k; June ISM nonmanufacturing employment index up to 52.3) offered some consolation for the US growth bulls, but the Fed will want to keep its options open and FX markets are unlikely to respond with clear conviction until the Fed’s position is clear.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank