BoJ Eases, Moody’s Downgrades
The BoJ unexpectedly followed in the Fed’s footsteps and effectively set an inflation target of +1% y/y. It also increased its target for asset purchases to help meet this new inflation objective. The asset purchase program was created in October 2010, and the ceiling on its stock of purchases has been raised twice before – but only in increments of JPY 5 trn. Today however, the facility’s ceiling rose a further JPY 10 trn and the aim is to spend all of this exclusively on JGB purchases before year-end. This is a significant amount of additional easing, and with the BoJ’s preferred measure of core inflation currently running at only -0.1% y/y investors are bound to expect further bouts of monetary accommodation down the road. USDJPY climbed 30 pips – a relatively energetic reaction to what is usually a mundane BoJ policy announcement. Separately, the BoJ’s long-running Rinban operations were left unchanged and so JGB purchases under that program will continue at a pace of JPY 21.6 trn per year. Moody’s downgraded six Eurozone sovereigns: Italy, Spain, Portugal, Malta, Slovakia, and Slovenia. The Aaa ratings of France, Austria, and the UK were affirmed but the outlook on each of the three ratings was lowered to negative from stable. Cable dropped 60 pips over the course of the Asia session on the back of this news. We have revised our FX forecasts, after the removal of some of the tail risks in the Eurozone, the better macro environment and the ECB’s ongoing liquidity measures. We raise our one and three month forecasts for the euro against the dollar and yen while retaining our underlying bearish view on the single currency. We now look for EURUSD to trade at 1.30 over one month (from 1.20 before) and 1.25 over the next three months (compared to 1.15 previously). Full details are in this week’s FX Perspectives.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank