– ‘Buy rumor, sell fact’ market reaction to BOJ’s policy announcement
As largely priced in by the markets, BOJ agreed to a 2% inflation target (note though BOJ board members Sato and Kiuchi dissented against this decision). In a joint statement, the government state that the BOJ should achieve its inflation target as soon as possible (no specific deadline mentioned). However, the measures announced to help achieve this new 2% inflation target appears somewhat weak. Specifically, the adoption of “open-ended asset purchasing method’ (ie to purchase assets without setting any termination date) made in unanimous vote will only kick in from January 2014 while no additional asset purchase was announced for 2013. The BOJ will buy JPY 13tn of assets every month (including JPY 2tn of JGBS) after it completes its current AP program at the end of 2013. This should increase the total size of its program by around JPY 10tn in 2014 and is expected to be maintained thereafter. We note too that there is no mention about (i) extension of duration in JGBs purchases and (ii) reduction/ abolishment the 0.1% interest on excess reserves (IOER), disappointing market expectations. On the economic forecast, BOJ’s inflation forecasts were little changed from October and is still well below its new 2% inflation target — FY 2012/13 CPI forecast raised to -0.2% vs. -0.1%, FY 2013/14 forecast kept the same at +0.4%, while FY 2014/15 forecast at 0.9%, from 0.8% in October. Meanwhile, GDP was revised down to 1% for FY 2012/13 from 1.5% but FY 2013/14 and 2014/15 forecasts were revised up to 2.3% (from 1.6%) and 0.8% (from 0.6%), respectively. Overall, the markets were disappointed and a ‘buy rumor, sell fact’ reaction was seen in USDJPY post-BOJ anoucement (about 1 big figure lower).
– EUR will be sensitive to ECB rhetoric
The leg higher in EUR since the January 10 ECB meeting has been driven by the surge in EUR rates following (a) hawkish ECB commentary and (b) growing expectations of large LTRO repayments by banks. Accordingly, the EUR will be sensitive to comments from ECB officials today (Nowotny at 16:00, Draghi at 18:00) and whether there is any clarification after the market’s hawkish interpretation of the Jan 10 ECB press conference. However, President Draghi speaks to a German audience, and this could see him err on the hawkish side. Any failure to dampen current market expectations should see the EUR remain well supported. We remain long EURCHF (new target at 1.2800) and EURSEK (target 8.80). Meanwhile, our economists look for a significant upward surprise on the German ZEW expectations index (15 vs. 11.3 consensus) which could provide further EUR support ahead of these ECB speeches. On the LTRO repayments, our rates strategist expects a more gradual pace of repayment (EUR 70-100bn) than current speculation (over EUR 200-300bn).
– BoC could hurt CAD; US debt ceiling deadline may be pushed back 3 months
The CAD is likely to face downside risk ahead of Wednesday’s BoC meeting and a likely weaker November retail sales print today could provide the initial stab. While rates are expected unchanged, our economists expect the statement to be quite dovish, including a downgrade to economic outlook. Our economists have pushed back their call for the BoC to raise rates by a full calendar year to mid-2014. With OIS still pricing in a tightening profile (+15bps over 12 months), CAD is vulnerable to a correction in the days ahead. Meanwhile, on the US debt ceiling negotiations, House Republicans announced their intention to pass a three-month increase in the debt ceiling this week, with the provision that if Senate Democrats fail to pass a budget, Congressional pay will stop. While it is not a done deal, our economists think that Democrats, despite not having passed a budget in four years, will sign on. Thus, late March/early April could be a challenging period for fiscal policy and near term, this could provide mildly supportive for risk-sentiment.
BNP Paribas