What will the BoJ do?

Recent comments by Japanese Finance Minister Azumi suggest that the authorities have grown more concerned about JPY strength. Just look at how many time authorities have been on the wires this week trying to talk the currency down. New WWII record yen highs have been more frequent with the speculation market heavily long dollars.

This week the BoJ topped up its asset purchase program by ¥5t. Thus far, it’s had minimal effect on its currency value. The JPY strength is a consequence of the country’s inability to recycle its current account surplus in the midst of global uncertainty and persistently low G10 yields. Their asset purchase fund requires additional funding to improve the monetary base relative to other Central banks programs. To get the market’s attention, measures similar to SNB’s actions are required. Direct currency market intervention will have an immediate impact. Then apply it again and then again.

Below are some other highlights of the week:

ASIA

• Chinese data continues to improve. HSBC flash PMI rose to 51.1 this month from 49.9 in September and suggests that the official PMI will outperform the usual +1.8pts seasonal decline.
• JPY: Yen printed a new WWII record high, a few times.
• INR: RBI hiked the repo rate +25bp to +8.5%.With current inflation at +9.2%, y/y last month, suggests that there is more tightening to follow. The market is not convinced that the RBI rate hiking cycle has come to an end and dealers are pricing their curve accordingly.
• NZD: CPI inflation fell to +0.4%, q/q in Q3, down from +1.0% in Q1 and lower than the consensus forecast of +0.7%.
• CNY: According to Capital Markets, Premier Wen Jiabao’s remark this week hinted at a possible easing by seeking “well timed and measured pro-active fine tuning” in macro policy. The Government seems to be in a position to cut the reserve requirement in small steps. Analysts believe that China’s willingness to ease could reduce the ‘tail risk of a hard landing”, support growth and general risk in the region.
• CNY: PBoC is expected to maintain their current FX policy, allowing controlled CNY appreciation outright (+4-5% over the next year).
• AUD: Aussie inflation moderated significantly in Q3. Mean and weighted median inflation fell to +0.3%, q/q, from the revised +0.8% in Q2. In annual terms, at +2.3%, y/y and +2.6% respectively, both are now back within the +2-3% target band. The probability of a rate cut at next weeks meeting has increased. Market is pricing in -25bp.
• NZD: Kiwi October business confidence and activity outlook fell to the lowest levels since the tragic earthquake in February. The activity outlook is still consistent with GDP growth of +2%, y/y, in early 2012, but below the RBNZ projection to stay above +3%.
• JPY: BoJ “upsized” its asset purchase program by Â¥5t. This has had a minimal impact on currency value.
• NZD: RBNZ kept the O/N rate unchanged and delivered a statement in line with market expectations. While domestic activity has expanded at “only a modest pace”, the RBNZ continued to expect to see “rebuilds to provide significant support and condition future hikes on global developments”. The Kiwi is similar to its neighboring commodity backed currency, the Aussie and will remain dependent on offshore sentiment.
• KRW: GDP grew +3.4%, y/y and +0.7%, q/q in Q3. The current account surplus widened to +$3.1b from +$0.3b in August. With the +4%, y/y, inflation rate difficult to achieve, analysts suggest that policymakers may tolerate more won appreciation to help curb import inflation, in our view.
• JPY: Industrial production surprised to the downside in September (-4% vs. +0.6%).
• JPY: There was further verbal intervention from Japanese Government Officials, gradually pushing yen away from record this weeks record highs.

EUROPE Week in FX

AMERICAS Week in FX

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