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1 Feb 2016
USD/JPY: More upside risks, 122.00 by end of March - Nomura
FXStreet (Bali) - Following the surprisingly dovish BOJ decision last Friday, Nomura maintains its end-March USD/JPY target at 122 and see more upside risks over the next few months.
Key Quotes
"The BOJ decided to introduce negative interest rates on excess reserves (IOER). While we saw a possibility of a rate cut, the introduction of negative rates at this juncture was a positive surprise. The Bank cut IOER by 20bp from +10bp to -10bp. The Bank also kept QQE programme unchanged, continuing JGBs purchases at a rate of JPY80trn per year, with ETF and REIT purchases as scheduled before.
The introduction of a three-tier system is better for risk sentiment than otherwise, as 1) the negative impact on bank profitability will be smaller, 2) it will enable the BOJ more aggressively cut if necessary. The Bank clearly stated that it can cut further when necessary, which suggests -10bp is not a lower bound. The BOJ referred to rates in Switzerland (-75bp), Sweden (-110bp) and Denmark (-65bp), all of which suggest the BOJ views much lower rates as possible.
To consider actions in the medium term, the composition of BOJ board will be worth monitoring. There are four dissenters (Mr. Kiuchi, Mr. Sato, Mr. Ishida and Ms. Shirai), but Ms. Shirai (March) and Mr. Ishida (June) will retire this year. More dovish board members will likely be appointed by PM Abe, which will enable the BOJ to consider more aggressive cuts if necessary, in our view.
However, as the BOJ changed its policy framework earlier than the market expected, further easing is now possible, even though a QQE expansion-type announcement is now less likely.
USD/JPY has already reacted positively to the decision, but we judge that the BOJ’s renewed dovish stance, with an increasing ability of further easing if necessary, will have a lasting negative impact on JPY via a wider rate differential.
In addition, the decision will increase market fears of future BOJ surprises, which will discourage investors from increasing JPY long positions and limiting the downside risks to USD/JPY.
We maintain our end-March USD/JPY target at 122 and see more upside risks over the next few months."
Key Quotes
"The BOJ decided to introduce negative interest rates on excess reserves (IOER). While we saw a possibility of a rate cut, the introduction of negative rates at this juncture was a positive surprise. The Bank cut IOER by 20bp from +10bp to -10bp. The Bank also kept QQE programme unchanged, continuing JGBs purchases at a rate of JPY80trn per year, with ETF and REIT purchases as scheduled before.
The introduction of a three-tier system is better for risk sentiment than otherwise, as 1) the negative impact on bank profitability will be smaller, 2) it will enable the BOJ more aggressively cut if necessary. The Bank clearly stated that it can cut further when necessary, which suggests -10bp is not a lower bound. The BOJ referred to rates in Switzerland (-75bp), Sweden (-110bp) and Denmark (-65bp), all of which suggest the BOJ views much lower rates as possible.
To consider actions in the medium term, the composition of BOJ board will be worth monitoring. There are four dissenters (Mr. Kiuchi, Mr. Sato, Mr. Ishida and Ms. Shirai), but Ms. Shirai (March) and Mr. Ishida (June) will retire this year. More dovish board members will likely be appointed by PM Abe, which will enable the BOJ to consider more aggressive cuts if necessary, in our view.
However, as the BOJ changed its policy framework earlier than the market expected, further easing is now possible, even though a QQE expansion-type announcement is now less likely.
USD/JPY has already reacted positively to the decision, but we judge that the BOJ’s renewed dovish stance, with an increasing ability of further easing if necessary, will have a lasting negative impact on JPY via a wider rate differential.
In addition, the decision will increase market fears of future BOJ surprises, which will discourage investors from increasing JPY long positions and limiting the downside risks to USD/JPY.
We maintain our end-March USD/JPY target at 122 and see more upside risks over the next few months."