In the FX space, speculation around the Bank of Japan’s policy decision has been much more prevalent in the global rates market than it has in USD/JPY. We think that a policy stance that would be more clearly targeted at the front-end, via rate cuts and asset purchases, and encourages a steeper JGB curve is in part designed to encourage a weaker JPY. But the strong correlation between the global safe-haven sovereign bond markets has contributed to similar moves in other bond markets, limiting the impact on bilateral rate differentials. In fact, the trade-weighted JPY has actually risen since the end of August even as BoJ expectations have risen.
FX markets appear much more downbeat on the prospects of a USD/JPY rally beyond the immediate reaction. After being disappointed by a lack of follow-through in USD/JPY in January, April, and July of this year, that hesitation seems warranted this time around. As our London colleagues note in their weekly, FX markets may be responding more clearly to the broader risk environment that has accompanied the recent rate move than they have to the rate move itself.
If that remains the case, USD/JPY may be ultimately driven more by the risk environment prevailing through and after the event rather than the specifics behind the BoJ’s program, despite their best efforts to target policy more specifically at a weaker JPY.
For that reason, we think the most critical piece of the BoJ puzzle for FX markets may be the total amount of QE. A commitment to lift all boats (even if it lifts some long-end boats less than other front-end boats) may be the chief factor to assuage the market’s primary “risk off” concern through the BoJ – that the BoJ and its peers are either running out of ammunition, need, or desire to use asset purchases as a primary tool of monetary policy.
Copyright © 2016 RBS, eFXnews™Original Article
