BOJ Stays Easy – USDJPY Ready to Rock?

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Market Drivers July 31, 2018
BOJ maintains easing policy
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Gold $1218/oz.
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Europe and Asia:
JPY BOJ maintains QQE

North America:
No Data

The BOJ maintained its dovish stance at today’s monetary policy meeting, reaffirming its commitment to QQE even as other G-3 central banks have moved towards normalization and tightening of liquidity. As a result, USDJPY rose towards the 111.50 level in morning London dealing with FX traders anticipating that monetary policy divergence will continue for the foreseeable future.

In his presser today BOJ Governor Kuroda noted that the policy will be more flexible with respect to bond yields, but noted that wider band around the 10 year JGB does not mean that the central bank will allow rates to rise. Mr. Kuroda also committed the BOJ to further buying of ETFs broadening out the purchases to the Topix index to the tune of 6 Trillion JPY.

In short, the BOJ remained open-ended in its pursuit of QQE as it continues to battle deflationary forces in the Japanese economy. Mr. Kuroda had no set target as to when the central bank will reach its 2% inflation goal and noted that the current policy of extremely low rates will stay in place for a sustained period of time

Although Mr. Kuroda left room for further tapering and has signalled that it will allow the yield on JGBs to double from 10 basis points to 20 basis points, the policy moves of BOJ stand in sharp contrast to the tightening actions of the Fed which is expected to a reaffirm its commitment to at least one and possibly two 25 basis rate hikes this year. The yield differential between the dollar and the yen will reach at least 200 basis points by Q3 of this year and such a rich carry trade is sure to exert upward pressure on USDJPY as long as financial markets remain calm.

Elsewhere, EU GDP came in at 2.1% versus 2.2% eyed missing slightly but the flash estimate of CPI came in at 2.1% versus 2.0% forecast. The EURUSD was generally unmoved in the wake of the release but traded near the highs of the day at 1.1725 as the short covering rally continued overnight.

With no US data on the docket today, the market is likely to remain relatively quiet as traders focus on ADP data tomorrow and the Fed monthly statement as well. Although the dollar has seen some profit taking at the start of the week, any positive eco data tomorrow could give the buck a boost reaffirming the policy divergence theme that has taken a back seat to the geo-political news over the past month or so. With USDJPY breaking above the 111.50 level in mid-morning London trade, the bulls will focus on running the 112.00 barrier as the day proceeds.

Boris Schlossberg
Managing Director

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