USD/JPY: Eyes Key 111 Support; What's Next? - Analysts

USD/JPY: Eyes Key 111 Support; What's Next? - Analysts

4 April 2016, 23:06
Vasilii Apostolidi
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The Japanese yen held a firm tone versus the dollar Monday, with dollar-yen nearing key support around Y111.00, despite inflation data released earlier suggesting scope for new Bank of Japan easing action at the conclusion of its two-day meeting on April 28.

Earlier in the day, the BOJ released the outlook for inflation as measured by the consumer price index (excluding the effect of tax changes) among companies polled in its quarterly Tankan survey for March.

Firms revised down their one-year inflation forecast to and 0.8% increase, down from 1.0% in December and 1.2% in September for the third straight quarterly downward revision.

The three-year forecast was lowered for the fourth consecutive drop to a 1.1% increase in March from 1.3% in December, 1.4% in September and 1.5% in June. The five-year forecast was revised down for the third consecutive quarter to plus 1.2% from 1.4% three months earlier and 1.5% in September.

"The worsening of inflation expectations alone isn't a decisive factor that would warrant additional easing policy but it is an unfavorable element for the BOJ and policymakers will carefully examine the results in addition to other upcoming economic data at the April meeting," noted MNI's Hiroshi Inoue.

The central bank will then release its medium-term outlook for economic growth and inflation rates until fiscal 2018 (which ends March 2019) at the meeting, he said.

"The focus is whether the BOJ again pushes back the estimated timing of achieving the 2% target from 'around the first half of fiscal 2017,'" Inoue said. See MNI Main Wire story at 7:16 a.m. ET for details.

Dollar-yen was trading at Y111.17 Monday afternoon, on the low side of a Y111.12 to Y111.80 range.

The Bank of Japan left policy unchanged at the March 15th meeting, with the central bank preferring to allow the market to further digest its adoption in late January of "Quantitative and Qualitative Monetary Easing with a Negative Interest rate."

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QQENIRP failed to have the desired effect of underpinning Japanese stocks and weakening the yen.

Indeed, dollar-yen fell to a low of Y110.99 on February 11, less than two week's after the BOJ's announcement in January.

On two occasions subsequently, the pair has rallied to levels over Y114, only to decline and retest the Y111 mark.

The most recent occasion, on March 17, saw a quick dip to Y110.67, the lowest levels since October 31, 2014, and then a fast-paced 100 pip-plus rally afterwards on talk of the BOJ "checking rates" in early U.S. action.

Most world central banks check FX levels with several banks daily, so the BOJ doing so would not be a surprise, but the combination of the dollar-yen tumble and recovery raised eyebrows at the time.

As dollar-yen again nears the Y111 mark, there is debate about what, if anything, the central bank may do to weaken the yen.

Traders said a sustained break of Y111 this time will target the psychological Y110 mark.

If Y110 gives way, there is not much in the way of support until the Oct. 31, 2014 lows near Y109.18, they said.

A sub Y110 decline might be enough to prompt yen jawboning from BOJ members, they said.

Bank of Japan Governor Haruhiko Kuroda will make opening remarkets before the BOJ Branch Managers meeting this Thursday, with the market watching for hints about further easing.

Given the reaction to negative interest rates on excess bank reserves, the market has begun to think that the BOJ may look at other easing measures, and in conjunction with government stimulus.

"Speculation has quickly spread about new economic stimulus measures via fiscal stimulus, the postponement of the next consumption tax hike and a simultaneous election of both the Upper and Lower houses of the Diet," said Tohru Sasaki, currency strategist at JP Morgan.

JPMorgan economists observed that "economic stimulus measures could be on a scale of Y5 trillion at a minimum, and that the government could reach decisions on whether to postpone the consumption tax hike and hold a simultaneous election of both houses sometime from mid-May onward," he said.

Looking out into May, Q1 GDP is scheduled for release May 18, he reminded.

"We forecast GDP of 0%q/q, saar, but a negative growth rate would mark a second consecutive quarter of contraction" and "Japanese media may make a fuss about recession and condemn Abenomics as failure," he warned.

Such turbulence would come just before G7 finance ministers and central bank governors meet May 20-21 in Sendai City, with their discussions setting the tone for the G7 Summit May 26-27 in Ise-Shima.

The decline in U.S. Treasury yields, seen in the wake of the March Fed meeting and in response to subsequent remarks, deemed dovish, by Fed Chair Janet Yellen, has been another factor weighing on dollar-yen.

Ten-year U.S. yields hit a low of 1.757% earlier Monday, the lowest yields since March 1.

U.S. yields tried after the release of both U.S. non-farm payrolls and ISM to break decisively over 1.80% - to no avail.

U.S. Treasury yields posted a low of 1.704% March 1, after troughing Feb. 24 at 1.649%, which was the lowest seen since Feb. 11, when U.S. yields bottomed at 1.530%, the lowest yield since August 2012.

Ahead of the March 16 Federal Reserve decision, 10-year yields posted a high of 2.00%, high levels last seen in late January, before the Bank of Japan announced negative interest rates on excess bank reserves.

Ten-year Japanese government bond yields last traded at -0.075%. JGB yields saw a low of -0.095% earlier. This compared to the record low JGB yield near -0.125%, seen March 18.

The market is keen to see how the 10-year JGB auction will be received Tuesday.

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