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28 Mar 2013
Forex Flash: Yen remains firmer as investors remain wary of contagion - BTMU
FXstreet.com (Barcelona) - Lee Hardman, FX analyst at the Bank of Tokyo Mitsubishi UFJ notes that the Yen strengthened modestly in the Asian session, although gains still remain modest ahead of next week´s key BoJ monetary policy meeting.
More broadly, he feels that the BoJ’s nominal trade-weighted yen index has stabilized at lower levels since early February after declining sharply by around 20% since July of last year. He notes that it’s recent stability in part reflects i) more risk averse trading conditions resulting from negative developments in both Italy and Cyprus, ii) yen overvaluation according to our calculations has likely been almost fully erased now, iii) the G7 statement helped to eliminate expectations that the BoJ would purchase foreign bonds in the near-term, and iv) that expectations of more aggressive easing likely to be adopted initially under the new BoJ leadership are already materially discounted by the lower value of the yen.
Hardman believes that these factors are likely to continue making further Yen declines more difficult from current levels in the near term. Further, he is also anticipating that the US economy will begin to show more evidence of slowing, heading into the middle of the year as fiscal tightening, resulting from the payrolls tax, sequester spending cuts, and 10% rise in gasoline price in 2013. He writes, “A slowdown in US growth momentum in Q2 could weigh modestly upon USD/JPY.”
Elsewhere, he notes that the 10-year US government bond yield is still struggling to break above 2.0% with its spread over Japanese 10-year government bonds still below 1.5% which historically appears consistent with USD/JPY comfortably continuing to trade within the new 90-100 range. he adds that the ongoing decline in the 10-year JGB yield towards the record low of 0.44% recorded in June 2003 is helping to gradually widen the US-Japan yield spread despite the lack of upward momentum recently in US yields.
Elsewhere, he feels that developments in the Japanese government debt markets signal that domestic investors are expecting an aggressive expansion of JGB purchases by the BoJ ahead and so far there is little long-term concern over a rise in inflation resulting from the BoJ’s policy. With the BoJ already set to purchase around JPY42 trillion of JGBs in 2013, he adds that any further expansion would result in the BoJ committing to purchase more JGBs than the government issues in the coming years. He finishes by writing, “The BoJ’s financing of the government is likely to help to keep the JGB market stable despite concerns voiced by BoJ Governor Kuroda overnight that Japan’s public debt is at an unsustainable level. It is important that the BoJ keeps pressure upon the government to reform the public finances to avoid policy complacency resulting from artificially low yields driven by BoJ purchases.”
More broadly, he feels that the BoJ’s nominal trade-weighted yen index has stabilized at lower levels since early February after declining sharply by around 20% since July of last year. He notes that it’s recent stability in part reflects i) more risk averse trading conditions resulting from negative developments in both Italy and Cyprus, ii) yen overvaluation according to our calculations has likely been almost fully erased now, iii) the G7 statement helped to eliminate expectations that the BoJ would purchase foreign bonds in the near-term, and iv) that expectations of more aggressive easing likely to be adopted initially under the new BoJ leadership are already materially discounted by the lower value of the yen.
Hardman believes that these factors are likely to continue making further Yen declines more difficult from current levels in the near term. Further, he is also anticipating that the US economy will begin to show more evidence of slowing, heading into the middle of the year as fiscal tightening, resulting from the payrolls tax, sequester spending cuts, and 10% rise in gasoline price in 2013. He writes, “A slowdown in US growth momentum in Q2 could weigh modestly upon USD/JPY.”
Elsewhere, he notes that the 10-year US government bond yield is still struggling to break above 2.0% with its spread over Japanese 10-year government bonds still below 1.5% which historically appears consistent with USD/JPY comfortably continuing to trade within the new 90-100 range. he adds that the ongoing decline in the 10-year JGB yield towards the record low of 0.44% recorded in June 2003 is helping to gradually widen the US-Japan yield spread despite the lack of upward momentum recently in US yields.
Elsewhere, he feels that developments in the Japanese government debt markets signal that domestic investors are expecting an aggressive expansion of JGB purchases by the BoJ ahead and so far there is little long-term concern over a rise in inflation resulting from the BoJ’s policy. With the BoJ already set to purchase around JPY42 trillion of JGBs in 2013, he adds that any further expansion would result in the BoJ committing to purchase more JGBs than the government issues in the coming years. He finishes by writing, “The BoJ’s financing of the government is likely to help to keep the JGB market stable despite concerns voiced by BoJ Governor Kuroda overnight that Japan’s public debt is at an unsustainable level. It is important that the BoJ keeps pressure upon the government to reform the public finances to avoid policy complacency resulting from artificially low yields driven by BoJ purchases.”