G20 Statements JPY amp GBP

The April G20 meetings in Washington DC are already under way and a few important remarks have been made, which may impact FX markets in the days ahead. UK Chancellor of the Exchequer George Osborne said the Bank of England’s quantitative easing has succeeded in boosting demand and is now in “in the process of managing the pace and timing of exit from extraordinary monetary stimulus.”. Separately, Japanese PM Abe said he plans to meet with BoJ Governor Kuroda. Later this month, according to sources. “We mention this because markets may speculate that Abe may pressure Kuroda to ease monetary policy further, something that would seemingly work against the JPY, particularly in light of the JPY’s further gains on the back of this week’s

Bank of Japan in wait-&-see mode for now

Earlier this week, the BoJ disappointed some yen bears when it held the annual pace of its monetary base unchanged at 60- 70 trillion yen (about US$580 billion), indicating the economic was running near full potential. PM Abe may be worried the sales tax hike, which went into effect this month, may exacerbate the fragile recovery.

But one sliver of hope for yen shorts is that the BoJ’s latest tankan survey of large and small businesses found business expecting a worse impact on consumption from this month’s tax hike than from the tax hike of 1997, which sank the nation back into recession.  This means the central bank is aware of the risk to consumption shifting from a mere slowdown in confidence to an outright standstill in demand.

FX traders deem the moment of BoJ intervention as an inevitability. The question then turns to that of magnitude and scale of increased stimulus. Will the BoJ simply increase its purchases of risk asset purchases such as ETFs, or will it also supplement that with an increase in the monetary base target? The next 2 months will involve a wait-and-see on Japanese data until the post-April data on sales, wages, CPI and industrial production emerges.

One major difference between the current BoJ governor and his 3 predecessors is that Kuroda was handpicked by PM Abe to play a major role in the reflating of the economy and revision of BoJ’s inflation objective. Another notable distinction is that Kuroda hails from the Ministry of Finance and is well aware of past government’s failures to turn deflation to inflation. So far, inflation has risen more than 250% over the last 12 months to 1.5%, the currency fell 35% and the Nikkei is up more than 80%. Kuroda has proven he can take charge and make a difference in the markets. But it may take a series of disappointments in the data, and even, in policy attempts before we see another bazooka from Kuroda. We may have to wait for renewed decline towards 100.30s before a new force of buying triggers a snapback towards 103.00s.

BoE’s turn to plan normalisation

In the case of the UK, Osborne’s remarks stating the BoE is planning an exit strategy far from imply that a tightening will take place this year. The IMF has already forecast 2.9% GDP growth in 2014 for the UK, which is higher than all G7 nations, including the US. We do not subscribe to the notion that the Bank of England has or will talk down the currency, as it is needed to offset any rebound in inflation. The index of economic surprises in the UK continues to exceed that of the US, Japan, Germany, Canada and China. Wage growth is closing the gap with inflation and business surveys have remained robust after hitting multi-month highs earlier this year. 1.6980 remains our objective and any decline below $1.63 remains behind us for now.