FX Flash
Group Economics Macro & Financial Markets Research
16 June 2016
JPY breaks 105 as BoJ on hold Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
JPY breaks 105 as BoJ on hold More monetary stimulus in July likely Risk of FX intervention will increase if JPY strengthens towards 100
JPY breaks 105 as the BoJ keeps monetary stimulus unchanged As expected the Bank of Japan (BoJ) decided to keep monetary policy unchanged today. The Japanese yen (JPY) strengthened to below 105 against the US dollar as about 27% of economists polled by Bloomberg on 6-10 June expected the BoJ to take action today. The BoJ members voted 8-1 to keep the asset purchases program unchanged while the negative interest rate of -0.1% to the policy rate balances was maintained with a 7-2 vote. More monetary stimulus in July likely In our view, the BoJ is likely to increase monetary stimulus in July as they seek to inflate the economy. The JPY nominal effective exchange rate (NEER) has strengthened by
more than 13% since the beginning of this year. A combination of lower rate hike expectations in the US, safe haven flows into the JPY and market bets that the Japan has reached its limits in inflating the economy supported the JPY. The JPY NEER is now at the strongest level since early 2013, when the BoJ first embarked on its qualitative and quantitative program. This will continue to pose strong headwinds to the BoJ’s objective of achieving their 2% inflation target. Indeed inflation ex food, energy and VAT has declined from 1.3% in December 2015 to 0.9% in April this year. Risk of FX intervention will increase if JPY strengthens towards 100 Safe haven demand is likely to continue to support the yen ahead of UK referendum on 23 June. Verbal intervention from Japan officials are expected given that the recent yen strength is partly fuelled by speculative forces. As shown in the graph below the yen has strengthened more than justified by real interest rate differentials. However volatility in the yen is not at extreme levels and hence the hurdle rate to justify a currency intervention currently remains high. Nevertheless, unilateral intervention by Japan is likely if the yen strengthens towards 100 against the US dollar. In the event of a Brexit (not our base case scenario), we do not rule out a coordinated intervention may take place to calm the currency market.
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FX Flash - JPY breaks 105 as BoJ on hold - 16 June 2016
USD/JPY; Real interest rate differentials Level
%
130
1.25
125 120
0.75
115 110
0.25
105 100 Jun-15
-0.25 Sep-15
Dec-15
Mar-16
Jun-16
USD/JPY (lhs) 10y US-JP inflation expectations adjusted yield spread % (rhs) Source: Bloomberg
JPY NEER; 1 week USD/JPY realized volatility Level
Realized volatility
135
25
125
20
115
15
105
10
95
5
85 Jan-11
0 Apr-12 JPY NEER (lhs)
Source: Bloomberg
Jul-13
Oct-14
Jan-16
1wk USD/JPY volatility (rhs)
3
FX Flash - JPY breaks 105 as BoJ on hold - 16 June 2016
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