BoJ provides much need stimulus and removes 0.1% floor for purchases of long term bonds

By Mike Jones


Squinting your eyes through a bit of overnight volatility reveals the NZD holding on a slow and steady path higher. Still, it’s been a relatively quiet 24 hours in markets all things considered.

Indicative of such, the NZD/USD has traded inside a narrow 0.8260-0.8295 range.

Yesterday’s less negative than expected balance of payments figures helped steady the NZD ship. The annual current account deficit increased to 4.9%, noticeably less than the 5.4% we were expecting.

The details of the release also looked positive, with much of Q2’s deterioration driven by an increase in profits by foreign owned NZ corporates.

We continue to caution that further deterioration in NZ’s external accounts is likely from here. Indeed, this forms a key part of our view that the NZD is likely to begin trending lower from mid to late next year.

Overnight, the JPY occupied most of traders’ attention, as it reversed all of the knee-jerk losses following yesterday’s Bank of Japan easing (see Majors).

In accordance with the stronger JPY, NZD/JPY has slipped back below 65.00, having spiked to almost 65.70 yesterday afternoon. We suspect further falls are in store for the cross.

On their own, NZ-JP 3-year swap differentials suggest the NZD/JPY should be trading closer to 64.00.

This morning’s June quarter GDP figures will set the NZD tone for the day. We expect them to be weak.

Yes, part of this reflects various technical and timing issues. Nevertheless, a result around the -0.1%q/q we expect (market +0.4%q/q) would undoubtedly knock some of the wind out of the currency’s sails.

Near-term support on the NZD/USD is eyed towards 0.8230. A daily close below this level would suggest the uptrend has run its course for now.


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After initially storming higher, the USD has ended the night on a softer footing. Most of the major currencies have notched up small gains against the greenback, led by the JPY.  Indeed, USD/JPY has set most of the broader USD direction over the past 24 hours.

The Bank of Japan joined the stimulus brigade yesterday, catching a few investors off guard. The size of its asset purchase program was topped up by ¥10t (taking it to a total of ¥80t). The BoJ also removed the 0.1% floor for purchases of long-term bonds.

We’ve been saying that only a ‘shock and awe’ easing from the BoJ would have any chance of driving the JPY sustainably lower. And so it proved to be the case.

After a knee-jerk spike higher yesterday afternoon, USD/JPY has subsequently skidded back to around 78.40.

Japanese bond yields, meanwhile, have barely budged. This may in part reflect rising political tensions between China and Japan. All up, there was nothing in yesterday’s BoJ announcement to threaten our updated USD/JPY forecasts. We continue to look for a further depreciation to 76.00 by year-end.

Elsewhere, there was a slightly brighter tone evident in financial markets overnight. Not only did the promise of more stimulus from the BoJ underpin sentiment, but the good news out of the US housing sector continued.

Global equity markets posted modest gains, and risk aversion gauges generally eased. Once again, however, the positive sentiment wasn’t reflected in commodity prices.

Oil prices tumbled a further 3.5% (to be down almost 7.5% for the week) after a surprise 8.5m barrel increase in US crude stocks and some chatter about increasing supply out of Saudi Arabia.

With the plunge in oil prices seemingly being driven more by supply-side factors than demand side, we don’t think it is a worrying sign for the global economy. Indeed, it may actually be positive. This is perhaps why we haven’t seen a sharper reaction in the ‘commodity-sensitive’ currencies like CAD, AUD, and NZD.

Looking ahead, whether risk sentiment can sustain its recent buoyancy may well depend on what tonight’s clutch of PMIs tell us about the health of the global manufacturing sector.

Clear signs that manufacturing activity has bottomed would be consistent with equity markets and high-beta currencies retaining their bid tone.

Other News:

*The Bank of England’s September MPC minutes showed a unanimous vote to keep the bank rate and asset purchase scheme unchanged, as expected. However, some members saw extra stimulus as more likely than not in the future.

*August US housing starts rise 2.3%, broadly as expected.

*US building permits fell a little less than expected (-1.0% vs. -1.9% expected), while new home sales surged 7.8%.

Event Calendar:

20 September: NZ GDP; CH HSBC Flash manufacturing PMI; EU European PMIs; UK retail sales; US jobless claims; US Philadelphia Fed index; US more Fed speak; 21 September: NZ net migration; NZ credit card billings.

All its research is available here.

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