1. At 104 $yen offers an attractive buy and sell side - from the position of not knowing what the BOJ will do..
- I dont think that this pull-back to 104 is a material shift in risk-sentiment, rather i think this is a technical sell-off where the 107 was hit (as highlighted) at which point BOJ/ UJ bulls lost confidence on their long positions which in turn caused a cascade of $Yen selling on profit taking - right into the 104 . Also as you can see the price traded to of the risk-rally price (currently at 40%) after 4days - i dont consider this a fundamental risk-shift, such a shift would cause much more aggressive selling in fewer days e.g. 50% in 1-2 days, rather than 4 - this just looks like a technical pull-back and i wouldnt be surprised to see use move into the 105mids again. However, A break below 104 and I would agree that this is a BOJ market expectations move/ shift in risk sentiment to risk-off.
2. Most of you will know that I have been a $yen bull for some time citing policy divergence and future policy divergence as the reasoning.
- So this in mind, going into BOJ/ Fiscal stimulus, where policy divergence is likely to increase, how does this affect my $yen view?
Bullish $Yen arguments:
1. The base case remains approximately 10bps to the depo rate, 10bps to the LSP, yen10trn to JGB and some 50-100% increase to the annual from 3.3trn + the median expectation of stimulus is Yen15trn.
- So from a bulls perspective i wonder, how much of this move is already priced in, given the 5-6% move from 100/101 certainly wasn't for free - I think at the 106/7 level pretty much all of the base view is priced e.g. 10bps depo , 10bps LSP, yen10trn JGB increase and yen10-15trn of fiscal stimulus..
- Thus to make a position worth while imo the BOJ/ Fiscal Stimulus is going to have to outperform the median expectation. Imo in order to see 111 and for $yen to trade at such levels as an average for the next 3-6, we would have to see the base case almost doubled; e.g. 20bps to the depo , 20bps to the LSP, yen20trn JGB and perhaps yen20-30trn fiscal stimulus (which has been mentioned).
The case for BOJ beating expectations:
- I think the market is somewhat underestimating the BOJ/ Govt at only 6bps given the BOJ is seeing an already -0.4% deflationary environment (-0.5% in Tokyo) when - 1) Yen is up 20-30% in 2016 vs most ccys - which is even more deflationary, they need a big package to reduce this; 2) 9 consecutive months of exports falling aggressively - deflationary and a function of strengthening Yen - needs to be combated by aggressive easing policy to devalue the yen for sustained period; 3) No policy change since January - so they have had 6 months of policy transmission, where the situation has worsened, to see now something drastic is needed; 4) Brexit/ Fed hike/ US Election/ China/ other risk-off factors likely to drive yen further up in the future - thus preemptive action needs to be taken now; 5) Great Pressure from JPY Govt/ public given -0.4%CPI is the rate they had back in 2014 when they started the massive QEE programme - basically hasnt changed in 2yrs - BOJ underpressure for results; 6) BOJ knows markets are ready to sell any "average" easing - so they know they need to be aggressive to beat/ get infront of the marker; 7) BOJ knows its perhaps the last and best time to reclaim any market trust/ confidence - anything less than extraordinary and market will continue selling any future BOJ policy as they are already inclined to do - Since BOJ/ Kuroda confidence is low as they have failed to deliver on several previous big occasions e.g. April.
- If the above materialises I advise buying $Yen at market price, with a 109-111TP.
Also, the 104 level was key on the way up (the breakout led to 107) so the fact that that has held indicates to me that the sell-off isnt a change in view and is more of a technical buyer TP situation - which makes sense as expectations regarding easing by the BOJ have dropped so buyers likely did take profit causing a cascade of selling.
This is just my view ofc, I dont see order flow but its my guess as it happened around the pivot level at 107 (which TP usually happens).