HALISTER1: Brexit Risk to Keep Spurring Yen as BOJ Seen on Hold: Preview

Brexit Risk to Keep Spurring Yen as BOJ Seen on Hold: Preview

(Bloomberg) -- The yen could advance beyond its May high to around 105 vs dollar if Bank of Japan decides against easing at its policy meeting this week, with Brexit risk continuing to drive demand for haven assets, according to analysts.
  • BOJ will maintain policy Thursday, according to 29 of 40 economists surveyed by Bloomberg; 11 expect stimulus
  • USD/JPY declines increasingly coincide with greater readership of Brexit stories, suggesting that Gov Kuroda’s influence on yen may be limited, according to Bloomberg analysis
  • USD/JPY currently little changed at 106.10 after falling for three straight days
  • Yen has risen 13% vs U.S. dollar this year and is best- performing G10 currency; May high vs USD was 105.55
  • NOTE: USD/JPY option traders vulnerable to BOJ surprise: analysis
  • Yen outlook:
  • SBI Securities (Tsutomu Soma, GM fixed-income department)
    • Yen should strengthen if BOJ holds; likely to breach May 3 high of 105.55
    • Gains may be limited as investors await results of July election in Japan and outcome of U.K. referendum next week, though concerns on Brexit lift currency
    • BOJ staying on hold this week would boost expectations of July easing, and markets may try to price that in toward next meeting, dragging yen down to around 110 per dollar
    • No move in June; expansion of negative rate and quantitative easing to 100t yen from 80t yen in July, esp if ruling LDP wins election
  • Daiwa Securities (Yuji Kameoka, chief currency strategist)
    • Weaker yen trend unlikely as BOJ doesn’t have many effective additional easing tools left
    • Even if BOJ expands easing, would only leave fewer options for future
    • USD/JPY trading range of ~102 to 110 for rest of yr, though floor at 105 over next month
    • Intervention isn’t expected when USD/JPY trades above 100; international community sees latest yen move as correction from weaker yen caused by BOJ policy, so unlikely to support idea of intervention
  • JGB outlook:
  • Mizuho Securities (Noriatsu Tanji, senior bond strategist)
    • BOJ is expected to stay on hold this week, but bond yield is likely to remain under pressure as investors continue to see possible further easing in July
    • BOJ may be “forced” to move in July if U.K. decides to exit EU, which would probably add appreciation pressure on yen and encourage Fed to stay on hold
    • If that happens, JGBs may trade as in Jan. when BOJ introduced negative rate, with short-to-medium tenor rates falling first to steepen the curve, and then long- and super long-sector rates rallying to flatten the curve
  • Okasan Securities (Makoto Suzuki, senior bond strategist)
    • Medium-to long-dated yields have been falling recently due to concerns about Brexit rather than expectations for BOJ easing
    • BOJ likely to stand pat at this meeting; impact will probably be limited
    • Yields likely to remain under downward pressure toward U.K. vote on June 23; should be little changed in July as “massive redemption” that has supported JGBs ends this month
  • Economic conditions:
  • Totan Research (Izuru Kato, chief economist)
    • Logical to expect more easing given weak inflation expectations, but may be hard for BOJ to act in June as decline in yen from easing may be limited since Fed is unlikely to raise rates soon
    • Expanding negative rates is undesirable before July election as policy isn’t popular among Japanese voters
    • BOJ probably wants to take action at most effective time amid limited options for easing; greater chance of move in July
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

Tickers
8301 JP (Bank of Japan)

People
Izuru Kato (Totan Research Co)
Makoto Suzuki (Okasan Securities Group Inc)
Noriatsu Tanji (Mizuho Securities Co Ltd)
Tsutomu Soma (Softbank Corp)
Yuji Kameoka (Daiwa Securities Capital Markets Co Ltd)

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