The Japanese Yen plunged after the BOJ delivered on aggressive stimulus expectations. Rate decisions from the ECB and the BOE are now in the spotlight.

Talking Points

Japanese Yen Sinks as BOJ Delivers on Aggressive Stimulus Bets
US Dollar Gains as USDJPY Rally Bleeds into Other Majors
British Pound Unlikely to Find Lasting Support in BOE Standstill
Euro to Fall if ECB Signals Easing Ahead on Deepening Recession

The Japanese Yen plunged in overnight trade, down as much as 2.6 percent against its major counterparts in overnight after the Bank of Japan (BOJ) announced an aggressive expansion in monetary stimulus efforts. Policymakers said they will target an outright expansion of the monetary supply from here, aiming to expand it from ¥138 trillion by the end of last year to ¥200 in 2013 and ¥270 in 2014 with a the goal of achieving a 2 percent inflation target.

The central bank will buy about ¥7.5 trillion in Japanese government bonds (JGBs) per month and lift the restriction on maturities eligible for purchase to achieve a reduction in borrowing costs at the longer end of the yield curve (the previous limit was 3 years). The maturity range for the BOJ’s holdings is expected to be around 6-8 years on average. In addition to JGBs, the BOJ will also purchase ETFs and J-REITs at a pace of ¥1 trillion and ¥30 billion per year, respectively.

The new BOJ effort implies a 44.9 percent increase in the central bank’s balance sheet by year-end. That compares with a 23.9 percent expansion for the Federal Reserve assuming the $85 billion monthly pace of asset purchases is maintained through the end of the year by the US monetary authority. On balance, that means Haruhiko Kuroda and company are set to outpace their FOMC counterparts on the monetary easing front.

USDJPY responded accordingly, soaring above the 95.00 figure en route to produce the largest daily increase in 17 months. The sharp move sent ripples of US Dollar strength across the forex markets, with the greenback adding 0.9 percent on average against its top counterparts.

Interest rate decisions from the Bank of England (BOE) and the European Central Bank (ECB) headline the economic calendar in European trading hours. While no immediate policy changes are expected on either front, traders will be looking for signs of forthcoming easing efforts in the rhetoric accompanying the announcements.

In the UK, the tone of economic news-flow has been little-changed since the March sit-down of the rate-setting MPC, so it seems likely that the doves on the Committee once again failed to secure a majority in favor of more QE. That seems unlikely to surprise investors however and thereby should not offer lasting support to the British Pound. With that in mind, we continue to hold short GBPUSD.

Much has been made of the change in the BOE’s remit in the 2013 UK budget to allow the central bank greater flexibility on its 2 percent inflation goal. The central bank hasn’t shied away from adding to QE even against a backdrop of elevated CPI before however, so the institutional framework change need not necessarily open the door for further.

Turning to the ECB, the spotlight will shine on the press conference held by President Mario Draghi following the policy announcement. Eurozone economic conditions have sharply deteriorated since the central bank’s last meeting and investors will be on the lookout for guidance on forthcoming stimulus efforts, particularly after inflation plunged to the weakest since August 2010 last month.

Signs of near-term accommodation on the horizon are likely to weigh on the Euro. Commentary on the evolving fiasco in Cyprus and its precedent-setting implications will also surface, but Draghi seems unlikely to offer anything of substance on this front. We remain short EURSEK.

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