BoJ unlikely to generate much more upside in USDJPY – BNPP

Research Team at BNP Paribas, notes that the Bank of Japan voted to keep the benchmark rate unchanged at -0.1% and have stated that the JPY 80trn annual monetary base target will now fluctuate in the short term in order to shape the slope of yield curve.

 Key Quotes

“The BoJ have also scrapped their target for the average maturity of its government bond holdings. Forward guidance has been strengthened, with the BoJ stating asset purchases will continue until inflation is stable above 2%, making it clear that exit won’t happen immediately if they hit 2%.

USDJPY has initially rallied 1% in response to the policy announcement as Japanese bank stocks (TOPIX banks index) have rallied 7% pushing the 1.5% Nikkei higher. The 10y JGB initially sold off 7bp but has since unwound more than half the move, meaning that 2s10s in Japan is only 2bp steeper versus yesterday’s close.

We do not see today’s policy announcement as consistent with generating a lot of upside for USDJPY unless the Fed delivers on a hike this afternoon. A steeper curve in Japan will likely be followed by steepening in the EUR and USD curves, which should coincide with a weakening in the global risk environment despite financial stocks outperforming. We think this should benefit the USD vs high beta G10 FX and reiterate our bearish AUDUSD recommendation. Based on our view for the Fed delivering a 25bp hike at their meeting today, we continue to target USDJPY reaching 108 by year-end.”