BoJ In The Spotlight
S&P lowering Greece’s outlook to negative, Spain revising budget deficit targets and a 0.9% drop in Germany’s June industrial production all weighed on the euro Wednesday. The chief beneficiaries were the Norwegian krone and Swedish krona, with EURNOK and EURSEK down 1.0% and 0.8%, respectively during New York trading hours due to selling by real-money investors. Sterling gained on the back of the BoE’s quarterly Inflation Report. The report was dovish as expected – GDP forecasts were revised downward, CPI forecast little changed at 1.7% in the crucial 2-3 year horizon – but it was Governor King’s suggestion that further monetary stimulus was more likely to be in the form of additional QE, rather than a rate cut, that sent the pound stronger against both the dollar and euro. We do not expect BoE action before November, i.e., until it gets a chance to assess the impact of Funding for Lending Scheme and the current QE programme. Ratings downgrades continued: Fitch downgraded Slovenia to A- (negative); DBRS cut Spain’s rating by two levels, Italy’s by one level, and assigned a negative outlook to Ireland. Fitch affirmed Germany at AAA with a stable outlook. We do not expect the BoJ to announce a full-fledged easing move at the conclusion of its policy meeting on Thursday, despite weak Japanese data in recent weeks. That the BoJ is finding it hard to meet its year-end target of asset purchases, JPY65 trn, makes an increase in the size of the Asset Purchase Program (APP) unlikely. We expect the BoJ instead to focus on a few fine-tuning operations aimed to pre-empt the under-subscription of the APP buying operations. We don’t see such adjustments as having a material impact on the yen, and so maintain our 1m USDJPY target at 78.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank