JPY Surged 3% Following BoJ’s Decision to Stand Pat and Push Back 2% CPI Target by 6 Months

29 April 2016

Rates & FX Market Update

JPY Surged 3% Following BoJ’s Decision to Stand Pat and Push Back 2% CPI Target by 6 Months

Highlights

¨   Global Markets: Strong participation from indirect bidders (65.6% vs 57.8% previously) underscored the strongest demand for the 7y UST auction this year, garnering a BTC of 2.65x and cutoff yield of 1.634% (previous: 2.51x; 1.606%). Similar appeal was seen on the USTs overnight where yields declined by another 2-4bps following the release of weak 1Q GDP (0.5% q-o-q SAAR vs 1.4% in 4Q15) which was marginally held up by consumer spending while initial jobless claims printed lower; maintain mild overweight bias on USTs. Meanwhile, JPY ended yesterday’s trading session at 108.13, surging by 3.00% as BoJ disappointed investors by voting to stand pat, undeterred by the mounting challenges posed by substantial appreciation in JPY on inflationary pressures. Additionally, BoJ pushed back its 2% CPI target by another 6 months to FY17/18 in its semiannual outlook, further eroding the credibility of the central bank. With USDJPY encroaching towards the 107 mark in the early session today, we maintain our neutral stance on JPY with expectations for a low likelihood for BoJ to intervene ahead of the G20 meeting in May.

¨   AxJ Markets: Singapore’s unemployment rate remained unchanged in 1Q at 1.9%, lower than consensus expectations of 2.0%. MAS cautioned on the prospect of weaker corporate margins and wage growth amid the softening global demand backdrop, which could weigh on the strength of SGD going forward; maintain neutral stance on SGD. Elsewhere, Thai Finance Ministry downgraded 2016 GDP growth forecast to 3.3% (previous 3.7%), citing weak exports which are expected to decline by 0.7% y-o-y compared to previous assumption of a 0.1% rise. ThaiGBs tracked gains recorded on the global markets, where we prefer to keep a short duration tilt on ThaiGBs while maintaining a mildly bearish stance on THB over the medium term.

¨   Mirroring movements on JPY, overnight gains in KRW were sustained in the early session today despite the weak IP, appreciating above the 1140/USD handle. With the export dependent economy likely to face further hurdles amid the weak external demand, South Korean authorities are likely to turn towards measures to spur the domestic economy, supporting the case for another 25bps in 2Q; maintain mildly bearish KRW.