BOJ Fails to Deliver – USD/JPY Takes a Hit

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Market Drivers July 29, 2016

BOJ program fails to impress
Cable drops on EOM EURGBP demand
Nikkei -0.69 Dax 0.05%
Oil $42/bbl
Gold $1349/oz.

Europe and Asia:
AUD PPI 0.1% vs. -0.2%
EUR GE Retail Sales -0.1% vs. 0.0%
GBP UK Mortgage Approvals 64.8K vs. 65.4K
EUR EZ CPI 0.2% vs. 0.3%

North America:
USD GDP 8:30
USD PCE 8:30
CAD GDP 8:30
USD Chicago PMI 9:45
USD U of M 10:00

The BOJ stimulus program landed with a thud is the currency market today taking the USD/JPY below the 103.00 mark for the first time in several weeks before the pair finally stabilized in European dealing.

After days of fervent speculation and a variety of leaks that pulled and pushed USD/JPY exchange rates like a yoyo this week, the BOJ finally revealed its much anticipated policy initiatives and they proved to be a major disappointment to the market.

Essentially the BOJ simply increased it allocation to ETF announcing that it would buy an annual pace of 6T yen versus the 3.3T yen level prior. The Japanese central bank did not cut rates further into negative territory nor did it announce any future plans to purchase long term JGBs.

BOJ Governor Kuroda did leave room for possible future moves, by announcing that the central bank would conduct a comprehensive assessment of effects of QQE with negative rate policy at next rate review. However, during the presser following the communque Mr. Kuroda refused to confirm that such an assessment would lead to major shifts in policy.

It appears that the BOJ may have reached the limits of conventional monetary stimulus and for now is loathe to entertain the more unconventional ideas such as deeper negative rates and possible monetization of government debt through the issuance of 50 year JGBs.

The reluctance to take bold steps was not well received by the market which wanted to see much more aggressive measures to fight deflation. Indeed earlier eco data showed that Japanese demand remains tepid at best with Household Spending slipping to -2.2% from -0.4% eyed. USD/JPY dropped to a low of 102.70 in the aftermath of the announcement before finally finding its footing.

Today in North America the market will get a look at the 1st reading of US GDP data for Q2. The consensus view is that growth accelerated to 2.6% from 1.1% the quarter prior. However if the number comes in even slightly softer it could easlly push USD/JPY back below the 103.00 level as all hope of Fed rate hike in September will be extinguished with markets likely lowering the odds for December hike as well. A better data point could push the pair above 104.00, but given the disappointing reaction of the market the upside is likely to be capped at that level.

Boris Schlossberg
Managing Director

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