GO Markets FX Analysis | Yen rallies after BOJ; meaningful correction or short-term reprieve?

Yen rallies after BOJ; meaningful correction or short-term reprieve?

In keeping with the recent theme across currencies, the Yen provided the bulk of excitement overnight with the currency seeing a material reprieve across the board.

As widely anticipated, yesterday the Bank of Japan adopted the 2-percent inflation target vigorously petitioned by Prime Minister Shinzo Abe over the last 3-months. In an effort to adhere to this target, the Bank of Japan agreed to launch an “open-ended” stimulus offensive to the tune of 13 trillion Yen per month. Nonetheless, with the program not due to commence until January of 2014, ensuing yen strength reflects a market – to a degree – uninspired by the Banks efforts. Still, the ‘buy rumor, sell fact’ scenario may only be short-term noise, with forward looking markets no doubt looking to price in the banks 2014 endeavors. For some, a short-term reprieve in Yen selling represents value before the Yen next leg lower is seen.

It’s also worth considering the possibility of the BOJ’s latest stimulus efforts being tweaked after the current Governor Masaaki Shirakawa’s term expires in April. We’re expecting to see a pro-stimulus ally of the Abe government installed, suggesting the banks latest effort may be just a taste of things to come.

The bank left the cash rate steady at 0.1 percent, with no immediate extension of the existing stimulus program which currently totals 101 trillion Yen. Markets had anticipated an extension of 10 trillion Yen.

Gains against the greenback saw the pair slump deep into the 88-handle, but appears to have consolidated losses around current levels of Y88.7.

A decline in existing home sales and a range of on-target earnings failed to inspire any meaningful rally from US equities. Earlier across the Atlantic, the latest ZEW survey of economic sentiment pleasantly surprised markets. According to the report, investor sentiment in Germany rose to a 32-month high of 31.5 in January, outpacing estimates of a moderate rise to 12 from 6.9 in December. The Euro-region equivalent survey showed a similar bounce, rising to an index level of 31.2.

$A turns bullish ahead of CPI

Losses against the Yen failed to spill across to the AUDUSD pair following the Bank of Japan’s announcement yesterday; rather, we saw solid support carry the local unit back to 105.8 US cents before easing slightly overnight.

Today we’ll find out just how much room-to-move the Reserve Bank has to make further policy tweaks, with the greatly anticipated fourth-quarter inflation data on the docket. Consensus estimates show consumer prices will increase 0.4 percent in Q4 to represent annual inflation growth of 2.4 percent from 2-percent in the third quarter.

True to form, it will be the RBA’s preferred measure of inflation (the trimmed mean and weighted median) that will be the market mover – both of which are expected to show 2.4 percent growth in annual terms, neatly between the Reserve Banks 2-3 percent target range. In quarterly terms, the average of both core readings are expected to show 0.65 growth. The currency implications are fairly simply with any on-target or below the expected reading suggesting the RBA have the ample scope to take the official cash rate below 3-percent, which in theory should encourage short-term downside for the Australian dollar. A deviation above estimates will therefore be a short-term bullish sign for the Aussie.

While most economists agree the RBA will hold fire in February, many expect the bank will pursue further policy easing over the course of 2013 ranging from 50 – 100 bps worth of interest rate cuts. Interbank cash futures imply a 34 percent chance Stevens and Co will slice another 25bps from the cash rate in February, down from 37 percent on Monday.

At the time of writing the Australian dollar is buying 105.64 US cents.

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