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3 Apr 2013
Fundamental Afternoon Wrap: All eyes on BoJ, ECB and BoE tomorrow
FXstreet.com (Barcelona) - This afternoon’s institutional reports were mostly focused on what is coming tomorrow from Japan, the Eurozone and UK regarding central bank policy.
JPY
From Japan’s side, Kit Juckes, Global Head of Currency Strategy at Societe Generale, said that the time has come for the BoJ to deliver, as it is the first formal policy meeting under the new governor and two new deputy governors who will in his view break new ground in terms of policy easing: “We expect a strengthened commitment to achieving the new 2% inflation target, backed by a large expansion of asset purchases. The possibility of reductions in some policy rates should also not be discounted, though given the level of current rates these would be largely symbolic. In short, we expect the BoJ to break with tradition and embark on a truly “bold” monetary policy as demanded by the new government”. However, as Brown Brothers Harriman analysts say, the market will be disappointed due to having much priced in already, making it harder to “shock and awe”. “Even Abe is backtracking a bit, saying earlier this week that the BOJ may not meet the new 2% inflation target over the course of two years. The BOJ will likely announce some new measures tomorrow but no matter what it does in the coming months, we continue to believe that the bulk of the yen’s weakness is already behind us”, concluded BBH analysts.
EUR
Despite the record high unemployment rate at 12% in the Eurozone and the gloomy Manufacturing PMI, Kit Juckes, Global Head of Currency Strategy at Societe Generale, expect the ECB to keep policy unchanged as this backdrop is not gloomy enough. BBH analysts expect the ECB to hold rates for now and that Draghi is likely to get many questions about the macro outlook, the exchange rate and still simmering problems such as Italy and Slovenia. Cyprus will be one of the main topics, as the IMF signed off on a standby deal for Cyprus, which was really just a formality after the country agreed to the Troika’s demands last month. “The IMF will contribute EUR1 bln to the bailout. The euro saw a small bounce on the news, but we expect recent trading ranges to hold ahead of ECB meeting tomorrow”, they wrote. Although the ECB is not expected to ease, in regard to policy tools the ECB could use, TD Securities analysts said that new LTROs would generally be positive for EUR/USD and German rates “as there is enough excess liquidity in the system that market pricing for normalized money market rates is already pushed back to 2015”. “There is simply limited scope for new liquidity to alter this pricing significantly as it would likely be drained before then. Even a refi rate cut, as long as it comes with no strong language on the potential for a deposit rate cut, would likely eventually be EUR+ as the improvement in sentiment and funding would outweigh the muted moves in STIR”, wrote analyst Richard Kelly.
GBP
The UK PMI Construction released today (at 47.2 vs exp. 48.0) is consistent with the view that the UK economy remains soft overall, according to BBH analysts, but no change in BoE policy is expected on Thursday as the BoE Governor King has been outvoted as the majority refuses to renew the gilt purchase program. They feel that this will likely change later in the year, after Carney has been installed as the new Governor. “Not enough growth” is what TD Securities point as the superficial problem in the UK with no doubt, but the BoE is conflicted as to what the underlying afflictions are, as well as what the potential remedies would be. “The plan continues to be targeting pockets of weakness as best as possible”, wrote analyst Richard Kelly, adding that downside data surprises through Q1 increase the risk of BoE action, but they continue to demand more justification before providing broad stimulus like QE. “If the economy continues to muddle through, May or August do become potential dates for further easing, but the form is wide open”, he added.
JPY
From Japan’s side, Kit Juckes, Global Head of Currency Strategy at Societe Generale, said that the time has come for the BoJ to deliver, as it is the first formal policy meeting under the new governor and two new deputy governors who will in his view break new ground in terms of policy easing: “We expect a strengthened commitment to achieving the new 2% inflation target, backed by a large expansion of asset purchases. The possibility of reductions in some policy rates should also not be discounted, though given the level of current rates these would be largely symbolic. In short, we expect the BoJ to break with tradition and embark on a truly “bold” monetary policy as demanded by the new government”. However, as Brown Brothers Harriman analysts say, the market will be disappointed due to having much priced in already, making it harder to “shock and awe”. “Even Abe is backtracking a bit, saying earlier this week that the BOJ may not meet the new 2% inflation target over the course of two years. The BOJ will likely announce some new measures tomorrow but no matter what it does in the coming months, we continue to believe that the bulk of the yen’s weakness is already behind us”, concluded BBH analysts.
EUR
Despite the record high unemployment rate at 12% in the Eurozone and the gloomy Manufacturing PMI, Kit Juckes, Global Head of Currency Strategy at Societe Generale, expect the ECB to keep policy unchanged as this backdrop is not gloomy enough. BBH analysts expect the ECB to hold rates for now and that Draghi is likely to get many questions about the macro outlook, the exchange rate and still simmering problems such as Italy and Slovenia. Cyprus will be one of the main topics, as the IMF signed off on a standby deal for Cyprus, which was really just a formality after the country agreed to the Troika’s demands last month. “The IMF will contribute EUR1 bln to the bailout. The euro saw a small bounce on the news, but we expect recent trading ranges to hold ahead of ECB meeting tomorrow”, they wrote. Although the ECB is not expected to ease, in regard to policy tools the ECB could use, TD Securities analysts said that new LTROs would generally be positive for EUR/USD and German rates “as there is enough excess liquidity in the system that market pricing for normalized money market rates is already pushed back to 2015”. “There is simply limited scope for new liquidity to alter this pricing significantly as it would likely be drained before then. Even a refi rate cut, as long as it comes with no strong language on the potential for a deposit rate cut, would likely eventually be EUR+ as the improvement in sentiment and funding would outweigh the muted moves in STIR”, wrote analyst Richard Kelly.
GBP
The UK PMI Construction released today (at 47.2 vs exp. 48.0) is consistent with the view that the UK economy remains soft overall, according to BBH analysts, but no change in BoE policy is expected on Thursday as the BoE Governor King has been outvoted as the majority refuses to renew the gilt purchase program. They feel that this will likely change later in the year, after Carney has been installed as the new Governor. “Not enough growth” is what TD Securities point as the superficial problem in the UK with no doubt, but the BoE is conflicted as to what the underlying afflictions are, as well as what the potential remedies would be. “The plan continues to be targeting pockets of weakness as best as possible”, wrote analyst Richard Kelly, adding that downside data surprises through Q1 increase the risk of BoE action, but they continue to demand more justification before providing broad stimulus like QE. “If the economy continues to muddle through, May or August do become potential dates for further easing, but the form is wide open”, he added.