BOJ EXPECTATIONS: EXCEED/ HIT - LONG USDJPY; MISS - SHORT GBPJPY
Updated
BOJ Miss - Sell GBPJPY market price; 129tp1 - up to 800pips.
1. A BOJ miss can be considered as delivering the median expectations e.g. 10bps cut to the depo (-0.2%), 10bps cut to the LSP (-0.1%), Yen10trn increase in monthly JGB purchases & 50% Increase in Annual ETF purchases e.g. 3.3trn-5trn. Fiscal Stimulus Yen10-15trn.
- The package above or less should be sold as the market expects this to maintain UJ at 105-6 level.
- The short GBPJPY is a great trade anyway as you benefit from the BOE easing carry which should in turn move us to 125 (BOJ miss and BOE hit) - which the BOE 1m forward OIS rates market currently prices 25bps at 100% and the average expectations are 25bps and £50bn of QE (even more certain now as the BOE M. Weale - the most hawkish MPC Member moved to the easing side as Business optimism and PMI dropped to their 10yr lows) - thus GBPJPY can expect further downside even past the BOJ as the BOE is all but guaranteed to ease "most members expect to ease at the august meeting" - July BOE Minutes Quote.
- Currently a BOJ miss is the most likely outcome - as many of you have seen in FX Yen has been brought aggressively as expectations have fallen, much a mirroring from the change in rates market where - For the 25th the 3m JPY Libor prices only a 6.65bps cut at to the key rate at 100% and on the same date the 3m euroyen August future prices only a 5.5bps cut at 100%. Though the further dated September 3m euroyen future prices a 9bps cut a 100% - likely a function of the market betting on more action being done in the september meeting (which makes sense).
BOJ HIt: Buy USDJPY market price; 107-111tp - up to 700pips
1. A BOJ Hit can be considered as double or more the median expectations (in my opinion) - 20bps+ to the depo, 20bps+ to the LSP, Yen20trn+ to the JGB Purchases and 100-200% extra annual ETF purcases from Yen3.3trn to 6.6/9.9trn. Yen20-30trn Fiscal stimulus.
- The package above or more IMO will allow yen to trade to 111, and for a sustained amount of time.
- The long USDJPY is the best proxy to play the "over-delivery" imo as USD is the most stable base, and has the most pips to gain on yen weakness - given FOMC hawkishness/ Hiking expectations give USDJPY topside even more impetus.
- As above, the markets currently DON'T expect this result, as Yen trades at the 104 level and rates markets price only 5-6bps of lowering. HOWEVER, if BOJ/ JPY Govt are to deliver a big easing package - one that smashes expectations (such as the one above) it will be now. The reason I think this is the case is below:
1. A BOJ miss can be considered as delivering the median expectations e.g. 10bps cut to the depo (-0.2%), 10bps cut to the LSP (-0.1%), Yen10trn increase in monthly JGB purchases & 50% Increase in Annual ETF purchases e.g. 3.3trn-5trn. Fiscal Stimulus Yen10-15trn.
- The package above or less should be sold as the market expects this to maintain UJ at 105-6 level.
- The short GBPJPY is a great trade anyway as you benefit from the BOE easing carry which should in turn move us to 125 (BOJ miss and BOE hit) - which the BOE 1m forward OIS rates market currently prices 25bps at 100% and the average expectations are 25bps and £50bn of QE (even more certain now as the BOE M. Weale - the most hawkish MPC Member moved to the easing side as Business optimism and PMI dropped to their 10yr lows) - thus GBPJPY can expect further downside even past the BOJ as the BOE is all but guaranteed to ease "most members expect to ease at the august meeting" - July BOE Minutes Quote.
- Currently a BOJ miss is the most likely outcome - as many of you have seen in FX Yen has been brought aggressively as expectations have fallen, much a mirroring from the change in rates market where - For the 25th the 3m JPY Libor prices only a 6.65bps cut at to the key rate at 100% and on the same date the 3m euroyen August future prices only a 5.5bps cut at 100%. Though the further dated September 3m euroyen future prices a 9bps cut a 100% - likely a function of the market betting on more action being done in the september meeting (which makes sense).
BOJ HIt: Buy USDJPY market price; 107-111tp - up to 700pips
1. A BOJ Hit can be considered as double or more the median expectations (in my opinion) - 20bps+ to the depo, 20bps+ to the LSP, Yen20trn+ to the JGB Purchases and 100-200% extra annual ETF purcases from Yen3.3trn to 6.6/9.9trn. Yen20-30trn Fiscal stimulus.
- The package above or more IMO will allow yen to trade to 111, and for a sustained amount of time.
- The long USDJPY is the best proxy to play the "over-delivery" imo as USD is the most stable base, and has the most pips to gain on yen weakness - given FOMC hawkishness/ Hiking expectations give USDJPY topside even more impetus.
- As above, the markets currently DON'T expect this result, as Yen trades at the 104 level and rates markets price only 5-6bps of lowering. HOWEVER, if BOJ/ JPY Govt are to deliver a big easing package - one that smashes expectations (such as the one above) it will be now. The reason I think this is the case is below:
Note
BOJ outperform case -- I think the market is somewhat underestimating the BOJ/ Govt at only 6bps given the BOJ is seeing an already -0.4% deflationary environment (-0.5% in Tokyo) when - 1) Yen is up 20-30% in 2016 vs most ccys - which is even more deflationary, they need a big package to reduce this; 2) 9 consecutive months of exports falling aggressively - deflationary and a function of strengthening Yen - needs to be combated by aggressive easing policy to devalue the yen for sustained period; 3) No policy change since January - so they have had 6 months of policy transmission, where the situation has worsened, to see now something drastic is needed; 4) Brexit/ Fed hike/ US Election/ China/ other risk-off factors likely to drive yen further up in the future - thus preemptive action needs to be taken now; 5) Great Pressure from JPY Govt/ public given -0.4%CPI is the rate they had back in 2014 when they started the massive QEE programme - basically hasnt changed in 2yrs - BOJ underpressure for results; 6) BOJ knows markets are ready to sell any "average" easing - so they know they need to be aggressive to beat/ get infront of the marker; 7) BOJ knows its perhaps the last and best time to reclaim any market trust/ confidence - anything less than extraordinary and market will continue selling any future BOJ policy as they are already inclined to do - Since BOJ/ Kuroda confidence is low as they have failed to deliver on several previous big occasions e.g. April.
Note
Any questions on the above let me knowNote
One other thought to the BOJ outperform case:1. We know BOJ and JPY Govt Abe/ Aso have had many meetings post-brexit and as it follows the JPY Govt have annonced that they will deliver a fisc stim package of 28bn - which was to the very right of the curve (10-30 was talked about).
- This in mind, imo it is rational to extrapolate that 1) surely if the JPY govt are choosing a tail end stimulus package (aggressive), BOJ will be inclined to do also? Given that it is the BOJ remit for economic targets like inflation, not the governments - BOJ wouldnt want to be seen as dropping the egg would they e.g. govt does as much as it can but BOJ only midly eases - doesnt make sense? Especially given the relationship between kuroda/ aso/ abe it would almost be impossible.
- 2) The BOJ will know/ see that the JPY Govt are taking the "extreme" side of measures, so once again this puts the BOJ under-pressure to do the same as they dont want to be seen as "letting the side down" especially as it is the BOJ who really has the power to change things - the Fiscal package is rather an indicative/ nice gesture of the govts willingness to help - rather than any real hard easing when you consider the Govt package is likely to be 28trn a year but the BOJ purchases/ injects 80trn A MONTH to its monetary based in JGBs - thats 960trn a year. So 27trn govt vs 960trn BOJ - is the govt really making an impact or are they instead signalling their commitment/ putting pressure on the BOJ? I think so.
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