BoJ not moving towards additional easing
- Analysts at Bank of Tokyo mitsubishi explained that they believe there are three key factors that have been at play to help support the yen, factors that we believe will continue into next year.
Key Quotes:
- "Firstly, the BOJ has become increasingly reluctant to ease its monetary policy further. The steps taken by the BOJ were all technical and more designed to maintain the current stance rather than to implement further easing. If anything the BoJ's action underlines the constraints that exist in implementing additional easing."
- "Governor Kuroda stated that there is no limit to monetary easing. But there clearly is and the extension of JGB maturities to 12yrs and the expansion of acceptable collateral underline the growing scarcity of JGBs in the open market."
- "Furthermore, there was nothing in the comments made by Governor Kuroda to suggest the BOJ is moving toward additional monetary easing. Admittedly, the wage negotiation period in Q1 2016 will be important and might change the BOJ’s stance but for now the BOJ remains optimistic over building price pressures persisting."
- "The BOJ is likely to cite underlying inflation (ex-fresh food & energy CPI at 1.2%) as justification for maintaining rather than increasing easing, especially with the economy now showing signs of improvement. It’s worth noting that on a per-capita GDP basis (World Bank data), Japan is the best performing G4 economy since the financial crisis (Japan 8.4%; US 7.3%; UK 5.0%; EZ 2.4%)."
Japan November industiral production likely to decline
- USD/JPY will be likely driven by the tug of war between USD and risk sentiments in the coming weeks. With USD strengthening putting pressure on the pair towards upward direction, the concerns on EM and deterioration in risk sentiment which is resulted in JPY multilateral appreciation.
- Japan's inflation and activity data will be in focus, beyond these external factors, including November CPI, household survey and November IP. December core CPI is likely to rise.
- "We expect the November household survey to show that real household spending dropped -2.2% y/y (consensus: -2.2%), marking the third consecutive month of decline. We look for November IP to have decreased -0.3% m/m after two months of increases", says Barclays in a research note.
Japan November IP likely to decline
- USD/JPY will be likely driven by the tug of war between USD and risk sentiments in the coming weeks. With USD strengthening putting pressure on the pair towards upward direction, the concerns on EM and deterioration in risk sentiment which is resulted in JPY multilateral appreciation.
- Japan's inflation and activity data will be in focus, beyond these external factors, including November CPI, household survey and November IP. December core CPI is likely to rise.
- "We expect the November household survey to show that real household spending dropped -2.2% y/y (consensus: -2.2%), marking the third consecutive month of decline. We look for November IP to have decreased -0.3% m/m after two months of increases", says Barclays in a research note.
USD/JPY likely to continue to trade in the recent 123 range going into 2016
- Bank of Japan intended to suppliment its QQE programme qualitatively without any quantitative easing further in previous week. Governor Kuroda described the decision as supplementary adjustment despite additional easing, after the meeting's press conference.
- Market reactions appear to show confusion and concerns regarding BOJ's policy communication that might continue to pressurise USD/JPY in short term as the gains after the Fed meeting are being lost.
- "We believe these measures are unlikely to generate depreciation pressure for the JPY even though it may support the durability of the QQE somewhat in the future. As such, we expect USDJPY to continue to trade in the recent range around 123 going into 2016", says Barclays in a research note.
Deploying USD/JPY put ladder serves hedging motives in sideways but slightly bearish trend
- We kept stating that yen's gains in long run, you get to know that from OTC markets positions and order flow basis, it seems that fed hike of 25 bps has already been fairly positioned and priced in especially hard currency pairs such as USDJPY.
- It is also understood that ATM contacts of USDJPY have gradually reduced implied volatilities after the much awaited fed's meet which has evidenced anticipated rate policy that has propped up dollar's strength (see and compare current IVs of 1w & 1m contracts with the last week's contracts).
- On the other hand, delta risk reversal for currency crosses dealing with JPY is still highest negative values among entire G7 currency space for next 1-2 months, but we believe some short upswings may be utilized for shorts. (Compare delta risk reversal with last week).
- This would mean that market sentiments for this pair have been bearish for this pair. As a result, we reckon that for next 2 months' time Yen may pretty much gain out of lots of manipulations and ambiguities are surrounding around dollar.
- The pair is likely to perceive implied volatility close to 7.3% and it is likely to reduce for 1M ATM contracts that has reduced at 6.9% from last week's 9%, thus we recommend deploying short put ladder spreads that contains proportionately less number of shorts and more longs which would take care of potential slumps on this pair and significantly higher volatility times.
- So, short ITM put with shorter expiry since implied volatility is inching higher which is good for option writers and buy 2 lots of ATM and OTM put with longer expiry.
Humans Claim Win Over Robots as BOJ's Late Decision Roils Market
- With every passing minute, traders became more and more anxious. No one was expecting the Bank of Japan to expand its unprecedented monetary easing, so why was it taking so long for it to announce its monetary policy decision?
- Then the news hit the tape: the central bank was going to extend the duration of the bonds it buys and start a new exchange-traded-fund purchase program. The Topix index jumped as much as 2 percent and the yen plunged 0.8 percent against the dollar, its steepest intraday slide in more than a month. In minutes those moves evaporated and reversed. Why?
- Investors digested the impact of the BOJ’s actions, and asked: Is that it? The enhancements to asset purchases were judged to offer very little in the way of extra stimulus. Some also said the moves showed human traders won over algorithm-based robots, saying the computers had been set up to react to any mention of expansion.
- “Don’t get me wrong, algos can help move quickly on headlines, but they’re sometimes bad at interpreting fundamental facts,” said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “I waited until the market calmed down. As soon as the details were clear, the market retraced quite a lot.”
- Indeed, within minutes of the initial moves, everything reversed. The Topix started tumbling, reversing a gain of as much as 2 percent to end the day down 1.8 percent. The yen rose as much as 0.7 percent against the dollar and strengthened versus all 16 major peers while bonds rallied hard to send 10-year yields to the lowest since January.
- “It was a shock. My reaction was like ‘What? Now!?’,” said Ayako Sera, a Tokyo-based market strategist at Sumitomo Mitsui Trust Bank Ltd., which has $453 billion under management. “At first it seemed like the BOJ were taking another step in their easing program, but when you look at what’s inside that, it’s nothing much.”
- The timing of the BOJ’s announcement matters. On days when the central bank announces new measures following two-day meetings, the news comes out on average 37 minutes later than when there is no change, an analysis by Bloomberg of BOJ decisions since 2010 shows. Today’s wait was the longest for a two-day event under Kuroda since April 4, 2013, when his original easing program was unveiled. A meeting on Oct. 7, 2014 also ran longer, but it was delayed after Kuroda was summoned to parliament.
- “With the BOJ decision taking longer this time, investors were buying on hope,” said Hiroaki Hiwada, a Tokyo-based strategist at Toyo Securities Co. “Then they realized that it’s not actually a big deal.”
- The details showed the BOJ adjusted its bond buying to focus on longer-dated securities, so it will purchase a maximum of 3 trillion yen of notes debt maturing in 10 years or more, rather than the 2 trillion yen cap for this month. And they were only going to add another 300 billion yen to ETF purchases, and that’s just to offset the negative impact for when the central bank starts selling some stocks it owns in April.
- “300 billion of ETFs is a small amount,” said Yoshihiro Ito, chief strategist at Okasan Online Securities Co. said. “It’s nowhere near the initial introduction of the QQE. In the end, it’s not the sort of extra buying that the market had hoped for, and I don’t rate it highly either.”
- It wouldn’t be the first time human traders were able to capitalize on the mistakes of computers. When a false report of explosions at the White House instantly wiped more than $136 billion off the value of U.S. stocks in April 2013, analysts blamed the plunge on programs that base trading decisions on news headlines. The Standard & Poor’s 500 Index recovered its losses within three minutes as investors determined the report, from a hacked Twitter account of the Associated Press, was incorrect.
- “The wording about ‘establishing a new program for purchases of exchange-traded funds’ is extremely misleading,” said Daisaku Ueno, the chief currency strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo. “As people started to realize that only the details had been tweaked, and the total package was unchanged, the yen weakness rapidly reversed.”
