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4 Apr 2013
Today's BoJ 3 potential scenarios to watch for - Kathy Lien
FXstreet.com (Barcelona) - Today's BoJ meeting, under the leadership of Governor Kuroda, is expected to trigger some wild swings in the Yen markets. According to Kathy Lien, co-founder at BKAsset Management, based on last week's comments, "he doesn't plan to keep the BoJ sitting on the their hands for another month."
"While most investors also expect Japan's central bank to announce new easing measures, the recent rally in the Yen suggests most expect the BoJ to underwhelm" Kathy says, adding that "Kuroda's team has many options at their disposal and the final announcement can take many forms." The analyst presents below 3 basic scenarios that traders should be watching.
From Kathy Lien:
Scenario #1 - BoJ Pull Forward Open Ended APP Program > Bullish for USD/JPY : The most aggressive announcement that the BoJ can make would be to pull forward their open ended Asset Purchase Program from 2014 to May 2013 or better yet, immediately. By shifting to unlimited QE, the central bank would prove to the market their level of commitment. This should come hand in hand with an extension of the duration of JGB purchases - the further out, the better. If they also increase the amount of risk assets bought beyond JGBs, it would be a perfectly wrapped gift to the economy and the market. Forex traders would most likely respond extremely well, taking USD/JPY up to 94 and possibly even 95.
Scenario #2 - Increase Scope and Maturity of their APP Program > Potential for Disappointment: While we would like to think the best of the BoJ, the second and most likely scenario is a contained expansion in monetary policy that would allow them to reevaluate the market's reaction and increase stimulus further at the end of the month. Currently the BoJ is buying JGBs up to 3 years, if they extend their purchases to 5 years and leave it at that, it would probably be interpreted as a disappointment. If they expand purchases to 10 years, it would be neutral to slightly bearish for USD/JPY but if they expand the maturity of bonds purchased to 30 years, it could lift USD/JPY but the gains would be nominal. Aside from the size and scope of asset purchases, the BoJ is also widely expected to form a new Asset Purchase fund by merging current JGB purchases with Rinban operations. They are also expected to abolish the banknote rule, which limits their long term JGB purchases to the amount of banknotes in circulation.
Scenario #3 - No Major Changes to APP Program > Bearish for USD/JPY: The third scenario would be the most disastrous for USD/JPY, which would be no major changes to the BoJ's asset purchase program. This is the least likely scenario because to forgo any major action would be a sign of weakness for the new central bank governor and raise the question of whether they will be able to make do on their promises at all. In this scenario, they would still probably abolish the banknote rule and merge JGB and Rinban purchases but that won't be enough.
Kathy ends her view on the BoJ meeting by connecting the dots with CFTC's IMM data, which suggests that many speculators remain short Yen, "so in order for the rally in USD/JPY to regain momentum, the BoJ will need to over deliver" she says, adding that "anything short of open ended QE and major expansion in the scope and duration of asset purchases may not be enough" Kathy concludes.
"While most investors also expect Japan's central bank to announce new easing measures, the recent rally in the Yen suggests most expect the BoJ to underwhelm" Kathy says, adding that "Kuroda's team has many options at their disposal and the final announcement can take many forms." The analyst presents below 3 basic scenarios that traders should be watching.
From Kathy Lien:
Scenario #1 - BoJ Pull Forward Open Ended APP Program > Bullish for USD/JPY : The most aggressive announcement that the BoJ can make would be to pull forward their open ended Asset Purchase Program from 2014 to May 2013 or better yet, immediately. By shifting to unlimited QE, the central bank would prove to the market their level of commitment. This should come hand in hand with an extension of the duration of JGB purchases - the further out, the better. If they also increase the amount of risk assets bought beyond JGBs, it would be a perfectly wrapped gift to the economy and the market. Forex traders would most likely respond extremely well, taking USD/JPY up to 94 and possibly even 95.
Scenario #2 - Increase Scope and Maturity of their APP Program > Potential for Disappointment: While we would like to think the best of the BoJ, the second and most likely scenario is a contained expansion in monetary policy that would allow them to reevaluate the market's reaction and increase stimulus further at the end of the month. Currently the BoJ is buying JGBs up to 3 years, if they extend their purchases to 5 years and leave it at that, it would probably be interpreted as a disappointment. If they expand purchases to 10 years, it would be neutral to slightly bearish for USD/JPY but if they expand the maturity of bonds purchased to 30 years, it could lift USD/JPY but the gains would be nominal. Aside from the size and scope of asset purchases, the BoJ is also widely expected to form a new Asset Purchase fund by merging current JGB purchases with Rinban operations. They are also expected to abolish the banknote rule, which limits their long term JGB purchases to the amount of banknotes in circulation.
Scenario #3 - No Major Changes to APP Program > Bearish for USD/JPY: The third scenario would be the most disastrous for USD/JPY, which would be no major changes to the BoJ's asset purchase program. This is the least likely scenario because to forgo any major action would be a sign of weakness for the new central bank governor and raise the question of whether they will be able to make do on their promises at all. In this scenario, they would still probably abolish the banknote rule and merge JGB and Rinban purchases but that won't be enough.
Kathy ends her view on the BoJ meeting by connecting the dots with CFTC's IMM data, which suggests that many speculators remain short Yen, "so in order for the rally in USD/JPY to regain momentum, the BoJ will need to over deliver" she says, adding that "anything short of open ended QE and major expansion in the scope and duration of asset purchases may not be enough" Kathy concludes.