Halister News

(Bloomberg) -- USD/JPY is vulnerable to a pull back below 110.00 if BOJ fails to live up to market expectations for some sort of additional QQE this week, Bloomberg strategist David Finnerty writes.

• 23 of 41 economists in a Bloomberg survey forecast BOJ will further ease policy at its meeting on April 27-28; central bank will also release the latest quarterly outlook report
• Comparison between 1-mo. USD/JPY implied volatility option smile today with a similar period prior to BOJ’s meeting in Jan. suggests investors are a lot more prepared for central bank easing now than in the first month of 2016
• Gov. Kuroda told WSJ earlier this month that the yen’s appreciation in recent months could undermine BOJ’s efforts to raise inflation rate to 2% and lead toward additional easing measures
  • Chart illustrates how decline in Japanese imported inflation due to stronger yen, weighed on CPI
• USD/JPY rallied last week following a Bloomberg report that BOJ officials were eyeing possible negative rate on loans
  • If BOJ does not ease in some form, investors may look to reverse this rally
• 1Q Tankan survey and various 1Q economic data don’t signal an economy strong enough to generate the demand-pull inflation needed to counter yen strength
  • Markets may question BOJ’s commitment to achieve CPI goal if easing is not undertaken, particularly as it expects March ex-fresh food and energy CPI, the new preferred measure of inflation, to rise by only 1.0% y/y from 1.1% y/y in Feb. extending its downward trend from Dec.
• Note that Fed FOMC decision on April 27 may adopt a more hawkish tone than at March meeting, and this could provide some degree of support to USD/JPY even if BOJ does not act

• NOTE: David Finnerty is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.