Dollar-yen to rise ahead of BoJ review – RBS

Research Team at RBS, notes that the dollar-yen remains in a 100-105 range despite soft US data and low Fed expectations.

Key Quotes

“We expect the pair will trade higher into a 105-110 range as the market prepares for the next Bank of Japan meeting on September 21 when the central bank will have conducted its ‘comprehensive assessment’ of its Quantitative and Qualitative Easing with a Negative Interest Rate.

The well-connected Reuters bureau in Tokyo reported last week the central bank had already prepared a preliminary outline of its review, still pledging to hit its 2% inflation target as soon as possible. The BoJ would also refrain from suggesting tapering was likely anytime soon.

If so, this leaves the risks skewed to the upside for dollar-yen as the central bank reviews whether it needs to change course to reach its inflation target more quickly. Reuters reported there was no consensus yet amongst policymakers whether negative rates needs to be deepened or asset purchases increased. But the risk of further action is likely to push dollar-yen up into a higher range before the meeting.

This morning Q2’16 GDP came out marginally weaker than expected with Japan’s growth flat in real terms versus a 0.5%q/q rise in Q1’16. Net exports and business investment both were drags on growth, likely owing to the rebounding yen hurting overseas orders and company profits. Consumption, however, held up as well as the GDP deflator at 0.8%y/y. Growth is likely to be supported by the government’s new supplementary budget in the second half of the year. But the GDP release shows the BoJ will struggle to hit 2% inflation without further easing.

In the week ahead July’s trade data is the main release for Japan.”