JPY: Losing the battle? - Rabobank

Jane Foley, Research Analyst at Rabobank, notes that Yesterday the S&P 500, DJIA and the Nasdaq all hit life time highs, yet USD/JPY edged lower towards the psychologically important 100 level.

Key Quotes

“The inability of USD/JPY to be drawn higher by risk appetite this year can be linked with scepticism regarding the impetus of BoJ policy. On January 29 2016, the BoJ controversially announced a negative interest rate. Even though the negative rate would not directly impact retail accounts it reportedly led to a surge in the sale of safes and concerns that the move could backfire as some consumers saved more to achieve a targeted pension pot. Several government officials distanced themselves from the BoJ’s decision and, while BoJ Governor Kuroda continues to defend the move, further rate cuts could be politically difficult.

Simultaneously, concerns have grown as to whether the BoJ’s asset purchasing programme could be reaching the end of the line. The BoJ is committed to purchasing JGBs so that their amount outstanding will increase at an annual pace of about JPY80 trn and ETF so that their amount outstanding will increase at an annual pace of about JPY6 trn. However, already the BoJ owns around one third of outstanding JGBs and there are concerns that it will become increasing difficult to find the supply to maintain the pace of this programme.

Simultaneously via the ETF buying programme the BoJ is reported to have become one of the top five owners of 81 companies in the Nikkei 225 and, according to Bloomberg estimates, is on course to become the No 1 shareholder in 55 of those companies by the end of next year. The BoJ has scheduled a meeting next month to fully evaluate the pass through mechanisms of monetary policy. As it stands the market has lost some faith in whether the BoJ has any monetary policy surprises left up its sleeve and this has limited the ability of BoJ policy to undermine the value of its currency.

There are several other factors that are supporting the yen this year. JPY vs. CHF has been on an upward part for the past year or so as the threat of intervention from the SNB has enhanced the JPY’s attraction as the ‘go-to’ safe haven currency. Due to pressure from the G7, in particular from the US, the Japanese authorities are less likely to intervene to weaken the yen. Although the strength of risky assets would suggest that safe haven demand should currently be at a low ebb, continued concerns regarding the pace of world growth in addition to the prevalence of various political risks suggests that some players may be reluctant to stray too far from a long yen position. CFTC data indicate that speculators have maintained net long JPY positions from the very start of this year. Previously, speculators had been short of the yen consistently from October 2012 through to December 2015.

Las month USD/JPY held above the 105 level for a few weeks. In our view this was an anomaly. The firmer tone in USD/JPY was in part fed by the better June US labour data. Also, last month the Abe government used its success in the Upper House elections to stir up excitement about its forthcoming fiscal stimulus programme. The market was also enthusiastic about the July 29 BoJ policy meeting. In the event both disappointed. Our central view suggests USD/JPY can trade around the 102.00 level in the coming months. However, the risk of a test below the 100 level is significant and a stumbling in general levels of risk appetite would lend the yen further support.”