London Session: The Fed continues to out-QE the BOJ

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By Kathleen Brooks | January 23, 2013 12:59 AM EST

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Risk sentiment has improved during the London session and European stock markets have moved higher throughout the morning as a much better than expected German ZEW survey helped the euro to recover back towards 1.3380. The markets will now look towards existing home sales and the Chicago and Richmond Fed manufacturing surveys for direction through the rest of the afternoon.

How to prepare for more active central banks


Economic data is becoming more important in a world where central banks are dominating currency moves. If US existing home sales can beat expectations of 5.1 million units in December and if surveys of manufacturing sentiment in Richmond and Chicago can buck the declining trend set by the Empire survey for New York then we could see Treasury bond yields start to rise, which will be pivotal for USDJPY in the near term.

The Bank of Japan engage in uber-QE lite - leave FX market wanting more


The Bank of Japan meeting didn't fail to be unimpressive. Expectations since the election of new PM Abe have been so high for an uber-stimulative BOJ that the outcome of today's meeting was bound to disappoint. The BOJ may have doubled the inflation target to 2% from 1%, however asset purchases remain unimpressive. The BOJ will continue to purchase a total JPY 25 trillion Japanese government bonds and T-bills this year, but then it said this will drop to JPY 10 trillion next year, which is de-facto tightening even though the BOJ did leave its APP programme open-ended as was widely expected. There was no move on cutting the benchmark rate (even though it is extremely low) or the rate on excess bank reserves held with the BOJ. Thus, the 2% target looks no more achievable than it did last year. Of course, the head of the BOJ will change in April, which leaves the door open to more aggressive stimulus later this year, but for now the BOJ doesn't seem to be whole-heartedly behind weakening the yen. Hence the yen has been a buy for most of this session.

Is the BOJ playing tactics?


The BOJ may be playing tactics: disappoint the market on the stimulus front to protect it and the government from accusations of currency manipulation? We shall have to wait and see. Added to that the future of BOJ policy is far from certain due to the change of leadership later in the spring. Thus, the decline below 89.00 doesn't suggest to us that the uptrend in USDJPY is over. Gains from now on might be less explosive than they were earlier this year and more incremental, but as long as we remain above 87.70 - the 21-day sma - we remain constructive on this cross and could see back to 95.00 in the next three months.

Looking at the Treasury market for direction


For USDJPY to make a leg higher we may need to see US Treasury yields move higher. As USDJPY has stalled in recent days so too have 10-year Treasury yields backed away from 1.9%. We need to convincingly break above this level and see yields move towards 2% to boost USDJPY in our view. This will only happen if the outlook for the US economy continues to improve and the threat of recession remains in the far-off distance. Thus, data watching in Japan and the US as well as monitoring central bank rhetoric is the name of the game for trading USDJPY in the medium-term.

The pound is still vulnerable


The pound was also in recovery mode today and has climbed back above key resistance at 1.5825 - the 200-day sma. It is currently making fresh daily highs at 1.5880. The next resistance levels of note are 1.5895 first, then 1.5925 and then 1.60. But before you get too excited that a recovery is upon us, there is a lot of event risk for the pound this week including the threat of dovish BOE minutes and weaker labour market data tomorrow and, of course, a weaker than expected Q4 GDP print released on Friday morning. The market may have brushed off weak public sector borrowing data and also weak CBI industrial trends data, but we believe the bearish case for sterling is still intact, even if the pace of losses starts to slow after last week's sharp sell-off.

GBPUSD is still vulnerable to a move back towards 1.55 in the medium-term, in our view. But the short term direction of the pound is likely to come from economic data, the most important of which is the Q4 GDP release on Friday. The market expects 0.1% gain, anything worse than this could send GBPUSD into a tailspin. Below 1.5830 the next key support level is 1.5755.

Waiting for the economics to catch up with the financials in EURUSD

The euro is an interesting cross in FX; it is being driven by an improvement in financial stability particularly in the peripheral sovereign bond market. Today suggested that even German investors are joining the party, when the ZEW survey from January saw a massive improvement in future expectations, which rose to a 2.5 year high. The current conditions index also rose for the first time since May 2012. Interestingly, while economic data has been a key driver of GBP, the euro has managed to move higher on the back of improving financial conditions, the economic picture still looks bleak for the Eurozone. However, the next leg higher in EURUSD above 1.34 (a very bullish development for this cross) is likely to be dependent on the economic data following the financial picture. This makes the first reading of Jan PMI in the currency bloc an important data point to watch on Thursday morning. The market expects this to improve, albeit from a low base. If these surveys beat expectations it could be the rocket fuel EURUSD needs to jump out of its recent 1.3265 - 1.34 range.

One to Watch: USDJPY and Treasury yields - we may need to see a pick-up in Treasury yields before USDJPY can make another attempt at 90.00. (See above for more details).

Source: and Bloomberg

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

d: +44.(0).20.7429.7924 | f: +44.(0).20.7929.2010 | M: +44 (0) 7919.411.957 | e:| w:

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