FX

October 31st, 2014 7:20 am | by John Jansen |

Via Marc Chandler at Brown Brothers Harriman:

Yen Weakens As BOJ Surprises

 – The BOJ delivered a dovish surprise at today’s meeting; Japan reported September national CPI and Tokyo October CPI overnight
– Eurozone data today was mostly softer than expected
– The Russian central bank hiked 150 bp to 9.5% vs. consensus for a 50 bp hike
– Brazil markets have so far reacted well to the surprise rate hike
– Mexican central bank meets and is expected to keep rates steady at 3.0%

Price action:  The dollar is broadly firmer today.  The yen was the biggest mover after the BOJ’s dovish surprise, losing over 2% vs. the dollar to trade at its weakest level since early 2008.  Dollar/yen ran out of steam just below 112.  The euro is trading near $1.2575, while cable is trading little changed near $1.60.  The dollar bloc and sterling are holding up better on the day.  In the EM space, KRW and RUB are underperforming, while IDR and MXN are outperforming.  MSCI Asia Pacific was up 1.3%, driven by the nearly 5% jump in the Nikkei.  Euro Stoxx 600 is up 1.4% near midday, while S&P futures are pointing to a higher open.  

The BOJ delivered a dovish surprise at today’s meeting.  The central bank eased monetary policy further by raising the monetary base to 80 trillion yen from 60-70 trillion yen previously.  The BOJ will purchase mainly long term JGB, which results in extending the average remaining maturity of JGBs to 7-10 years from 5-7 years.  BOJ also announced it will expand purchase of ETFs and J-REITs at an annual pace of about 3 trillion yen and 90 billion yen, respectively.

In addition, Japanese media is reporting that Japanese government pension funds (GPIF) will boost limits for both local and overseas stocks to 25% and foreign bonds to 15%.  Both measures have strengthened risk on sentiment, as the Nikkei index rose by around 5% and the yen weakened over 2% against the dollar.  Global bourses are following the Nikkei higher today.  Along with other reports about a potential supplemental budget, today’s BOJ pretty much kills any notion of another retail sales hike.  Clearly, the Japanese economy was not holding up as well from the first tax hike as many officials had been saying.  

Dollar/yen broke decisively above 110, ostensibly to a new 110-115 range from 105-110 previously.  Japan officials have been careful not to mention the exchange rate in any policy discussions, but a weaker yen will be a by-product of these policy changes.  G7 officials may fire another warning shot across Japan’s bow, but the BOJ is simply doing what the ECB and (until recently) the Fed had already been doing policy-wise.

Japan reported September national CPI and Tokyo October CPI overnight.  National headline rose 3.2% y/y vs. 3.3% consensus, while national core rose 2.3% y/y vs. 2.2% consensus.  Tokyo headline rose 2.5% y/y vs. 2.7% consensus, while Tokyo core 2.1% y/y vs. 2.0% consensus. Japan also reported September jobs data, with the jobless rate coming in right at the 3.6% consensus.  Overall household spending contracted -5.6% y/y in September, weaker than the consensus -4.3%.

Eurozone data was mostly weaker than expected.  Germany reported September retail sales at -3.2% m/m vs. -0.9% consensus, France reported September consumer spending at -0.8% m/m vs. -0.3% consensus, and Italy unemployment came in at 12.6% vs. 12.4% consensus.  Eurozone October headline CPI came in at the 0.4% y/y consensus, up from 0.3% in September, while core rose 0.7% y/y vs. 0.8% consensus.  Yesterday, German CPI readings (both headline and core) came in softer than expected.  All told, data will surely keep alive the notion that the ECB will need to do more to head off deflation risks.

During the North American session, the US reports Q3 Employment Cost Index as well as September personal income and spending data.  October Chicago PMI will also be reported, expected at 60.0 vs. 60.5 in September.  Final Michigan consumer confidence is seen steady at 86.4.  Elsewhere, Canada reports August GDP, with consensus for flat m/m and 2.3% y/y readings.

The Russian central bank hiked 150 bp to 9.5% vs. consensus for a 50 bp hike.  We had warned of the risk of a greater hike.  However, we think this smacks of desperation as higher rates are unlikely to do much to help support the currency as weakness is purely structural.  S&P kept Russia at BBB- with negative outlook last week, as downgrade risks remain alive even as fundamentals deteriorate.  RUB gains Thursday looked like a short squeeze ahead of the central bank meeting, as there was no fundamental news for the huge 3% gain.  USD/RUB appears to have posted a key reversal on Thursday, but there has been little follow-though movement in the wake of the rate hike.  In related news, it appears that Russia and Ukraine have reached a deal that would allow natural gas shipments to resume.  

Brazil markets have so far reacted well to the surprise rate hike.  However, what really ails Brazil is the fiscal situation.  September budget data will be reported today, with another big primary deficit expected.  Consensus reading of –BRL12.6 bln would push the 12-month surplus down to BRL43.95 bln, the lowest total since November 2009.  Rousseff will likely get a 3-6 month honeymoon by the rating agencies to get the fiscal numbers back on track.  If not, we think Brazil will be moved into junk territory next year.  For USD/BRL, support seen near 2.40 and then 2.35, resistance seen near 2.45 and then 2.50.

Mexican central bank meets and is expected to keep rates steady at 3.0%.  The central bank sees the latest inflation spike as temporary, and so will not hike rates in response.  On the other hand, the bank should paint a fairly upbeat picture of the Mexican economy.  An improved US outlook and better Mexico data should keep the bank from cutting rates, so steady rates are likely well into 2015.  For USD/MXN, support seen near 13.40 and then 13.20, resistance seen near 13.60.

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