Expect A Big & Powerful BoJ Easing; Buy USD/JPY - UBS

Good morning,

- Best/worst performers in majors vs USD today: EUR: 0.2%, GBP: 0.2%, CHF: 0.1%, CAD: -0.0%, NZD: -0.3%, AUD: -1.7%.

- China Industrial Profits rose 11.1% Year-over-Year through March. Statistics bureau says due to cost cutting, investment, pricing and sales.

- Chinese industrial profits through March rose 11.1% - the most since July 2014 to 1.34Tln Yuan. NBS says its sales and prices.

- Aussie consumer inflation (CPI) misses on both the headline and core figures. Rate cut expectations rise, Aussie Dollar falls.

- ...$AUDCAD dampens the 'risk' and 'commodity' factor. Focuses on a possible data reaction via competitive rate view.

- I like the $AUDJPY setup, but this is more a 'risk' sensitive pair rather than a data reaction (Aussie CPI).

- Wow. Venezuela is imposing a two-day work week for civil workers to help overcome an energy crisis.

- We expect the BoJ to ease policy at the April meeting: We believe that the BoJ will ease further on 28 April, an event to which we attach a probability of about 65%. We expect a powerful package of ¥20tn in increased QQE purchases and a cut in the interest on excess reserve rate (IOER) of 20bp to -0.30%. The BoJ is also likely to apply a negative rate on its lending facility. Economic sentiment and market conditions have worsened considerably Conditions are no longer such that the BoJ can stand by if it is to maintain expectations of achieving its 2% inflation target. The currency has strengthened considerably, manufacturing conditions in the Tankan survey have deteriorated sharply and inflation expectations have also fallen.

An easing of fiscal policy also to come later in the spring

On the timing of the move, we think Japan also needs to show it is working to avoid a global recession in the run-up to hosting the G7 summit on 26–27 May. The Japanese government seems keen to demonstrate its leadership to other nations by implementing a large monetary policy stimulus. In addition, we expect a supplementary budget and a further delay to the consumption tax hike in April–May. A fiscal and monetary policy mix at the same time would likely help support both corporate and market sentiment.

What is the likely market reaction?

A strong easing of a 20bp cut in the IOER and a ¥20tn increase in QQR as we expect should lead to a strong move upward in USDJPY. This would serve to underline our year-end forecast of 122, something which might be under threat with a less-active BoJ.

- EUR/USD: Shift from bearish to neutral: Likely in 1.1200/1.1400 range. The break of 1.1330 (high of 1.1338) suggests that the bearish phase that started about 2 weeks ago has ended (target at 1.1145 was not met). The outlook from here is viewed as neutral and we expect this pair to trade between 1.1200 and 1.1400 for now (only a clear break below 1.1200 or above 1.1400 would indicate the start of a directional move). GBP/USD: Bullish: Take partial profit at 1.4670. We just turned bullish yesterday and GBP quickly approaches our 1.4670 target (high of 1.4640). As mentioned, 1.4670 is a very strong resistance and this level may not be easy to break. Thus, those who are long may like to take some partial profit at this level.

That said, a clear break above 1.4670 would shift the focus to the year-todate high of 1.4815. USD/JPY: Bullish: Target a move to 112.20.

There is no change to the bullish USD view as highlighted yesterday. However, overbought short-term indicators would likely lead to a couple of days of consolidating first.

The target and stop-loss remain unchanged at 112.20 and 109.80 respectively.

- Major news for today: NZD Official Cash Rate, USD Federal Funds Rate, USD Crude Oil Inventories, JPY Monetary Policy Statement.