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Fundamental Morning Wrap: “Shock and awe” by BoJ ahead of ECB

FXstreet.com (Barcelona) - Today’s monetary policy meetings are the focus of this morning’s institutional reports, mainly surprised with the extension of the BoJ action while the ECB should only attract by its press conference.


BTMU analysts admit that the BoJ agression surpassed the already high market expectations and there certainly cannot be any sense of disappointment. The statement set a time horizon for achieving a 2.0% inflation level “of about two years” and will be obtained by : a) The adoption of the monetary base control which is expected to result in the monetary base rising from JPY 138trn at the end of 2012 to JPY 270trn at the end of 2014; b) an increase in JGB buying to around JPY 7trn per month and an extension of maturities purchased out to 40 years which will take the average maturity held by the BOJ out from slightly less than three years to “about seven years”; c) an increase in ETF and J-REITs. These measures were all passed by unanimous votes. BTMU analyst Derek Halpenny added that the 2% target will continue as long as necessary, but finds hard to understand how the rule limiting JGB holdings to below banknotes in circulation that was scrapped can be “temporary”. Also, he feels that with the BOJ now buying out to 40 years there is a high risk that the financial markets will start to conclude that the BOJ is moving toward debt monetization. Kit Juckes, Global Head of Currency Strategy at Societe Generale, is surprised with what looks like a 100% increase in bond boosting, instead of the expected 50%. “This is the kind of aggressive easing we are used to seeing from the Fed and would just love to see more of from the ECB...”, he continued, but not sure if the BoJ will manage to deliver the 2% inflation on 2 year time scale.


Derek Halpenny, European Head of Global Markets Research at the Bank of Tokyo Mitsubishi UFJ, wrote: “We still expect the ECB to cut but today is premature and today could be more about Draghi reassuring the markets that progress is being made. The BOE decision in the wake of the announcement of a remit change could be more interesting given Governor King is pushing for restarting QE. The Cyprus shock won’t help the UK economy and there is certainly a potential for a surprise from the BOE”. Camilla Sutton, Chief Strategist at Scotiabank, expects Draghi to sound more dovish after the 12% unemployment rate and the March PMIs. Richard Barnwell and Xinying Chen at RBS see more scope for action in June, “but in order for that to happen, we would need to see sufficient bad news on the macroeconomic front”. Jim Reid, analyst at Deutsche Bank, are more interested in Draghi’s press conference and what he has to say about Cyprus. Emile Cardon, Strategist at Rabobank, said a rate cut by the ECB at this point would smack of uncertainty if not outright panic among the Governing Council. Christin Tuxen, analyst at Danske Bank, believes a refi rate cut would EUR negative to the extent it leads to a flatter EURIBOR curve, with a EUR/USD dip below 1.27.

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