Aussie Employment Due
The FOMC minutes published overnight showed little sign that the Fed is drifting towards another round of balance sheet expansion. Indeed only a “few members expressed the view that further policy stimulus would likely be necessary”. The US Treasury market was largely indifferent to these revelations, but US stocks temporarily weakened before eventually recovering in full. Ultimately the S&P500 closed flat on the day. USDJPY strengthened during the US session, but the move got underway long before the FOMC headlines hit the wires. Our economists look for the Bank of Japan to loosen policy further at Thursday’s policy decision. A downward revision to the bank’s CPI outlook seems likely on the back of subdued oil prices, and this alone would be enough to justify an adjustment to the policy settings. The most likely outcome in our view is a JPY 5 trn increase in the size of the Asset Purchase Program (APP), targeted exclusively at JGB purchases. Market expectations for further easing seem quite limited due to a more upbeat Tankan survey recently. Also managing down expectations is the fact that formalities have not been completed in time to allow two newly-appointed doves to attend the meeting. As such there is scope for a modest amount of yen weakness if the bank does indeed raise its target for JGB purchases. We would stress though that how these additional purchases are funded will govern the currency reaction – given the recent lack of demand at auctions of 6m yen liquidity there is scope to divert money set aside for this purpose into JGB purchases instead. In this case there would be no net new easing, and the yen would likely stand its ground afterwards. Today’s employment report from Australia will also be closely watched as a key input into the RBA’s monetary policy decision on August 7 – expect AUDUSD to be sensitive to any significant surprise.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank