Hawkish FOMC and BoJ’s additional easing to support the USD/JPY – Deutsche Bank

Taisuke Tanaka, Strategist at Deutsche Bank, suggests that the possibilities of the FOMC (26-27 July) again showing hawkish bias and BoJ’s additional easing (we forecast a 10bp rate cut, increased ETF and REIT buying), will likely support the USD/JPY.

Key Quotes

“In particular, we cannot eliminate the possibility that 29 July, which brings the BoJ meeting and the release of GPIF results, could also see the concerted announcement of economic policy measures likely to be formulated prior to the expected 3 August Cabinet reshuffle. We would see possible positive support for the USD/JPY if this series of events buoys share prices.

The USD/JPY market's recent rally to the 107 level eliminated the considerable volume of dollar-sell orders that Japanese exporters had built up at the 105’s level. As a result, Japanese traders' hypersensitivity to the USD/JPY falling below 100 has somewhat eased. In addition, we see the move from 105 to the 110 level - the next peak for dollar selling for export hedging - as delivering neutral-biased pressure for the USD/JPY.

However, the major media sources are reporting that even if economic measures in Japan are of a business scale of ¥20-30trn, the freshwater is likely to be about ¥3trn. In addition, BoJ Governor Kuroda's comment during a mid-June BBC interview that ruled out "helicopter money" has led to a correction of excessive expectations for BoJ policy. However, as we cannot exclude the possibility of Japanese policymakers coolly overturning previous statements for the sake of surprise, the market has not simply turned to disappointment.

It is difficult to expect that the Abe administration would not take advantage of the overlapping events of the BoJ meeting, economic measures, and GPIF results and would offer up disappointments that could lead only to falling stock prices and a stronger yen. However, compared with the preceding estimates for economic measures involving considerable sums and for extreme "helicopter money" policy, we think whatever policy the government delivers will likely have only a limited bullish impact on the USD/JPY on top of that to date. On the other hand, there also could not be a substantial risk of a USD/JPY pullback on disappointment following policy announcements.

After confirming the series of policy events, we see the USD/JPY looking for direction at 105±3/4 range while watching key US data into next week and expectations for interest rate hikes. GPIF's FY3/16 results on 29 July will likely spur discussion of substantial losses on risk assets due to depreciation in share prices and the USD/JPY. However, we think they will not change their behavior as index investors of supporting the USD/JPY by dip-buying. From a currency viewpoint, our focus is on the leeway they have for such buying.”