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Jun 13 - 02:55 PM

Credit Agricole: Potential for BoJ to Disappoint at This Week's Meeting

By eFXdata  —  Jun 13 - 01:30 PM

Synopsis:

Credit Agricole highlights the potential risk of the Bank of Japan (BoJ) disappointing market expectations at its upcoming June meeting. While the JPY has seen some support from recent events, there is a concern that the BoJ may not meet investor expectations for reducing JGB purchases.

Key Points:

  1. Recent Support for JPY:

    • The JPY has been supported by a softer EUR due to French President Emmanuel Macron's call for a snap election, adding political risk to EUR/JPY.
    • Softer-than-expected US CPI data provided additional support.
    • However, the hawkish stance of the Fed has limited the JPY's gains.
  2. BoJ's Expected Actions:

    • Credit Agricole's Japan economists expect the BoJ to leave its policy rate unchanged.
    • They anticipate a reduction in JGB purchases from JPY6trn to JPY5trn per month.
    • The JGB market appears priced for this reduction, based on modeling of 10Y yields.
  3. Market Expectations:

    • The BoJ has already reduced buying in the 5-10Y part of the curve, providing modest support to the JPY against rising UST yields.
    • Japan’s rates market is pricing in a low probability of a policy rate hike.
    • Reducing JGB purchases is seen as a way for the BoJ to support the JPY without raising the policy rate.
  4. BoJ's Concerns:

    • Board members, including Governor Kazuo Ueda, have expressed concerns about the weak JPY's impact on inflation.
    • This suggests the central bank will likely reduce its JGB purchases.
  5. Risk of Disappointment:

    • With investor expectations already built in for a reduction in JGB purchases, there is a risk that the BoJ might disappoint if it does not meet these expectations.

Conclusion:

Credit Agricole sees a risk that the BoJ may disappoint at this week’s June meeting if it fails to meet market expectations for reducing JGB purchases. While recent events have provided some support to the JPY, the central bank's actions will be crucial in determining the currency's performance.

Source:
Crédit Agricole Research/Market Commentary

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