IGM Credit, IGM FX and Rates
03 Aug 2020
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The BOJ will be delivering it's latest policy decision tomorrow, and we don't expect any changes from them.
As we mentioned in our viewpoint posted on 25 May, the upside pressure in 10yr JGB yields has abated alongside UST yields (owing to the Trump political turmoil, scepticism of a 3rd Fed hike for 2017 amidst growing concerns of a more subdued US Q2 growth rebound), which negates the need to tweak the YCC targets (guiding s/t rates to -0.10%, targeting the 10yr yield around 0%) at this stage.
As mentioned back then, our expectation of the window opening up for a change in BOJ policy has been pushed back from Sep to Dec, which would bring it more or less in line with the end of the ECB's QE program, and we expect the BOJ will keenly follow the market reaction to the ECB's move as a template.
Market focus on any guidance shift
It would have been a pretty straight-forward non-event by way of an unchanged on-hold stance/dovish tone after the shocking miss in Japan's final Q1 GDP.
That said, things have been somewhat complicated after the recent bout of speculation surrounding the BOJ's forward guidance.
In essence, the dynamic within the BOJ is reminiscent of that within the ECB. Gov Kuroda will likely push back against hawkish leanings.
On balance, we do not expect a guidance shift this time around with any change more likely in either the Jul or Sep meetings.
There will likely be little meaningful market impact from the BOJ decision as such.
Looking further out, the balance of risk is tied to USD/JPY weakness which could frame the sentiment on the broader Yen complex.
For the 10yr JGB yield, we are still expecting it to consolidate around 0.047% for the time being.
See below for our take on the BOJ's YCC.
For the 20s, we still expect it to mostly trend sideways btwn 0.520-605% in the n/t.
We refer back to our 01 Jun viewpoint.
The BOJ will inherently be loath to cut purchases in the mid sector given any such move would jolt the market and push the 10yr yield significantly higher, which then brings back the spectre of an unlimited bond purchase operation last seen in early Feb. Recall the BOJ's rumoured line in the sand was the 10s pushing well above 0.100%.
What changes could be seen ahead? Possibly a cut in the 1-3yr purchases
YCC machination facilitates tapering that's gone under the radar
IGM Credit, IGM FX and Rates
By Tim Cheung 03 Aug 2020
Xinhua News Agency reported the Politburo held a meeting on the economy on 30 July (Thursday). The CCP also held a meeting with non-CCP political parties and non-political representatives. President Xi chaired both meetings. Compared to the meeting held on 17 April, we note some changes in wording were made to the remarks on monetary and fiscal policies in the 30 July meeting. 30 July meeting (as per Xinhua News Agency): - "While requiring full implementation of macro policies, the meeting called for pursuing a more proactive and effective fiscal policy that delivers solid outcomes, and a more flexible and appropriate monetary policy that targets sound results, according to the meeting". 17 April Meeting (as per Xinhua News Agency): - "Monetary policies should be more flexible and balanced and instruments such as reserve requirement ratio cuts, interest rate reductions and reloans should be fully leveraged to ensure reasonable and sufficient liquidity and a lower interest rate in the loan market, the meeting said, stressing the need to channel capital into the real economy, especially medium-sized, small and micro enterprises".
Topics Industry News