GBPJPY: BOJ MISS; BOE HIT? MORE SELLING ON THE HORIZONBOJ Miss:
1. BOJ deliver one of the biggest misses in history (vs expectations/ pressure) - only increasing ETF purchases and dollar funding by apprx $60bn annual in total vs 10-20bps of Depo and LSP cuts + 5-20trn in QE increase + ETF increase.
*See attached post for in-depth detail on the BOJ situation and price action history/ Yen strength/ Safe havens*
BOJ Miss Compounded with a BOE Hit:
1. BOE are expected to ease by 25bps and possibly add 50bn to their QE programme on Thursday - a BOJ miss combined with a BOJ hit should cause compounded losses for GBPJPY as there are two drivers - Yen should continue this week to get stronger (as BOJ easing expectations surpass and Yen strength increases) whilst GBP gets weaker as the BOE on Thursday likely takes action, reducing the value of Sterling - with both providing the optimal environment for downside.
- Historically, when BOJ has delivered new policy/ missed GBPJPY has sold off aggressively between 2-8days and 700-1200pips. Now whilst I dont expect the same level of aggression in the near-term as the relative value is much lower now (135 vs 175) so moves lower should be smaller - I do expect that 400pips lower on the day is not the end of the selling rally for GBPJPY.
- Initially at the start of the week i expect GBPJPY to move lower at least another day (satisfying historical moves), perhaps into the 133.5 level which would be 550pips, lower than the smallest sell-off but fair given the relative value changes - not that i would be surprised to see more.
- Later into the week is when I expect the bulk of GBPJPY losses to come (e.g. Thurs/ Fri) - the reason for this is as 1) any Yen downside risk from the MOF releasing upside in the details of their stimulus package would have surpassed e.g. increased stimulus from 28trn-40trn (unlikely) or increased govt spending section - both of which devaluing yen moving gbpjpy potentially higher. Though I think the risks are more skewed to MOF delivering a package that strengthens JPY as it undershoots expectations as several MOF members have mentioned the package being over several years - the more years the less punch the package has (given some expected it (5% of gdp) to be spent in 1yr), equally the less direct govt spending portion of the package will also lessen the depreciative impact on yen (rumoured to be 13trn, if less then Yen could get considerably stronger). As mentioned I see the MOF release to be asymmetrically skewed to expectation downside for these reasons.
2) BOE GBP selling pressure would happen when they cut the rate and adjust their QE programme - this is a highly likely scenario as BOE MPC Minutes in July said "Most members expect to loosen policy in August" and recently the BOE's biggest hawk M. Weale switched stance in light of UK Business PMI/ Optimism prints at 10yr lows saying the BOE needs to act fast/ delaying policy further doesn't make sense.
Trading strategy: Sell GBPJPY @mrkt 133.5TP1 130.5TP2 128.5TP3 - risk averse traders could wait for the 50-60% MOF/ general Vol bounce into 136-38 level before shorting - I would reshort here anyway.
