FX Flash
Group Economics Macro & Financial Markets Research
22 September 2016
Bullish or bearish JPY? Bullish or bearish JPY?
Roy Teo
USD/JPY range of 100-104
Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
Bullish or bearish JPY? In the past 24 hours, the lack of a bazooka from the Bank of Japan (BoJ) and ‘inaction’ from the Fed have been positive drivers of a stronger Japanese yen. We were disappointed that the BoJ did not cut the policy rates further into negative territory and lowered the interest rate on funding through the Loan Support Program to -0.2% to reduce the impact for banks. However they have tweaked their policy to steepen the yield curve by purchasing JGBs such that the 10 year JGB yields will remain around 0%. This should support bank lending activities and is a negative for the yen as inflationary pressures recover. Having said that firmer yields at longer tenors may result in pension funds and life insurers reducing their purchases of overseas assets as domestic yields become less unattractive. Hence the pressure on the yen may be less pronounced. Nevertheless, real interest rate differentials between the US and Japan are also holding up after adjusting to both the BoJ and Fed events. The latter is not supportive of a stronger yen against the US dollar. In addition, financial markets have not fully priced in our view that the Fed is likely to raise interest rates later this year in December. Steeper JGB yield curve is positive for USD/JPY Level
Real interest rate spread holding up %
130 125 120 115 110 105 100 95 Jan-15
Jan-16
Jul-16
%
1.40
125
0.70
1.20
120
0.50
1.00
115
0.30
0.80
110
0.10
0.60
105
-0.10
0.40
100
-0.30
0.20
Jul-15
Level
95 Jan-16
-0.50 Mar-16
May-16
Jul-16
Sep-16
USD/JPY (lhs) USD/JPY (lhs) Source: Bloomberg
20y-2y JGB yield spread % (rhs)
10y US-JP inflation expectations adjusted yield spread % (rhs) Source: Bloomberg
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