Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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BOJ Preview: Tapering and Rate Hike Talk Not Enough to Boost JPY
Charu Chanana
Chief Investment Strategist
Key points:
- The Bank of Japan is set to announce its policy decision on June 14.
- Reports suggest that the BOJ will consider tapering its purchases of JGB purchases. Depending on the gross/net amounts, this could mean QE tapering or even a start of QT.
- Guidance on the upcoming rate hikes is also expected.
- However, a recovery in the yen against the USD is still unlikely given the wide rate differential. If hawkish signals are prominent, yen could rise on some of the crosses.
The Bank of Japan meeting announcement is due on Friday, June 14. The central bank is likely to keep its short-term target rate unchanged at 0-0.1%, but it has been reported that the BOJ will consider scaling back its purchases of Japanese government bonds (JGB).
The BOJ currently buys 6 trillion yen of JGBs per month. Any cutback in this amount will mean tapering of quantitative easing (QE). More importantly, if the BOJ shrinks its balance sheet by reducing its new JGB purchases to less than the pace at which its current holdings are expiring, then this would mean Quantitative Tightening (QT). This will likely be a strong message on both inflation and FX from the BOJ.
Market expectations are also focused on signals for a possible rate hike in July, influenced by the outcomes of recent shunto wage negotiations.
Comments from Ueda will likely signal conviction towards reaching the 2% inflation target, and hints that the BOJ is attentive to a weaker yen and will take further steps on policy normalization. However, BOJ’s pace of normalization is likely to remain gradual, and therefore Ueda’s remarks will also be cautious and hedged. Ueda is likely to emphasize that monetary conditions will remain accommodative despite any policy adjustments.
While the prospect of QT and hints of a July rate hike could exert upward pressure on JGB yields, their impact in supporting the yen against the US dollar may be limited.
The USD has found additional tailwinds recently to stay supported for now, which include:
- Fed is still reluctant to cut, even though data weakness has broadened and disinflation progress appears to be on track.
- European political turmoil is resulting in safe-haven flows to USD
- EM election shocks in Mexico and India, signalling risks of carry unwind in EM FX and demand for quality carry in USD
USDJPY may have seen a top for this cycle at 160, given the rate differential between US and Japan is likely to narrow, and not widen, from here. However, even if the Fed cut rates twice this year, that will bring the Fed Funds rate down only to 4.75-5%. Meanwhile, the market has priced in 20bps of rate hikes for the BOJ for this year, and that will still mean an over 4% rate differential between the Fed and the BOJ which is significant and would limit the recovery of the yen and the greenback.
Direct FX comments from the BOJ’s desk at this meeting also remain unlikely given the criteria for depreciation of the yen that usually worries them has not been met – a 10 yen/USD move within one month, or a 4% depreciation in the yen over two weeks.
The yen could, however, see a more pronounced recovery on the crosses if the BOJ’s tapering size and the guidance on upcoming rate hikes manages to send a hawkish signal to markets. EURJPY and CADJPY could move back lower towards the 50-day moving average around 167.50 and 113.50 respectively.
Recent FX articles and podcasts:
- 10 Jun: EUR: Election jitters and ECB rate cut add to downside pressures
30 May: JPY: Intervention fears clash with carry trade attractiveness
29 May: AUD: Hot inflation reaffirms rate cuts remain some way off
- 15 May: AUD: Tailwinds to stay despite Budget impact
- 7 May: AUD: RBA fails to meet the hawkish expectations
- 3 May: JPY: Staying on intervention alert
- 30 Apr: AUD: Retail sales miss questions RBA market pricing
- 26 Apr: JPY: Bank of Japan adds to reasons to stay bearish yen
- 25 Apr: JPY: Accelerated sell-off; can the BOJ halt yen's decline?
- 25 Apr: Thematic Podcast: Deciphering Asian forex interventions
- 23 Apr: GBP: What can drive the next leg lower?
- 18 Apr: JPY: Intervention alert, or a BOJ alert?
- 16 Apr: Chinese Yuan’s Double Whammy - Dollar Strength and Yen Weakness
- 9 Apr: CAD vulnerable as market underprices dovish Bank of Canada risks
Recent Macro articles and podcasts:
- 28 May: Macro Podcast: When speech trump numbers
- 12 Jun: France Election Turmoil: European Equities Amidst the Upheaval
- 11 Jun: US CPI and Fed Previews: Delays, but Dovish
- 10 Jun: Macro Podcast: Nonfarm payroll shatters expectations - how will the Fed react?
- 3 Jun: Macro Podcast: It is a rate cut week
- 16 May: US CPI: Putting a September Fed Rate Cut Back in Play
- 14 May: US inflation report: How to trade the event
- 8 May: Bank of England preview: Rate cuts in mind, but patience required
- 2 May: Fed Decision: High-for-longer, not higher-for-longer
- 30 Apr: FOMC rate decision: How to trade the event
- 29 Apr: Macro Podcast: Japanese drama - what's next for the yen?
- 12 Apr: Riding the Fed-ECB Policy Divergence
- 11 Apr: ECB rate decision: How to trade the event
Weekly FX Chartbooks:
- 10 Jun: Weekly FX Chartbook: US CPI and FOMC dot plot have a low dovish bar
3 Jun: Weekly FX Chartbook: ECB and Bank of Canada likely to cut rates
27 May: Weekly FX Chartbook: Fresh USD upside from hawkish bolts and trade threats
- 13 May: Weekly FX Chartbook: US CPI and US-China trade tensions on the radar
- 29 Apr: Weekly FX Chartbook: Fed’s hawkishness meets BOJ’s dovishness
- 22 Apr: Weekly FX Chartbook: Stretched USD strength is raising intervention alert
FX 101 Series:
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