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May 10, 2013
Forex Flash: Weak broad money supply growth may restrain JPY sell offs for a time - BMO Capital Markets
FXstreet.com (Barcelona) - Stephen Gallo, European Head of FX Strategy at BMO Capital Markets believes that weak broad money supply growth may restrain JPY sell offs for a time.
He continues, noting that he will at least be keeping an eye on the release of Japanese broad money supply growth for April due out on overnight on Monday and the market consensus is for an unchanged reading of 2.5% y/y. He feels that although market psychology can sometimes be a more important factor for short-term FX rate fluctuations than actual fundamentals, many times the former simply needs “catching up” with the latter. He writes, “As we have shown in the past, the current levels of the JPY may not fully reflect Japanese fundamentals, which haven’t in our opinion necessarily moved in favour of a weaker JPY as of yet.”
Further, he adds that things will change drastically if there is ever any BoJ talk of withdrawal from exigent measures as targets which the central bank has set for itself are hit, but for now we believe that sharp increases in Japanese broad money supply growth (which may lead to faster rates of inflation further out) should be viewed as a supportive factor for the JPY cross rates, whilst unexplained weakness in M3 should have the opposite effect, and potentially trigger questions about potential JPY overshoot to the downside. Overall though, for now he still views the pronouncements of Japanese real money investors regarding their overseas investment decisions and the “hard” or anecdotal flows evidence itself as the higher impact factors for the JPY, given the fact that flows are a much bigger force for FX rates than fundamentals over the short-run. He writes, “Flows will also come first given the fact that flow-driven fluctuations in the JPY can actually help the BoJ achieve some of its goals.”
He continues, noting that he will at least be keeping an eye on the release of Japanese broad money supply growth for April due out on overnight on Monday and the market consensus is for an unchanged reading of 2.5% y/y. He feels that although market psychology can sometimes be a more important factor for short-term FX rate fluctuations than actual fundamentals, many times the former simply needs “catching up” with the latter. He writes, “As we have shown in the past, the current levels of the JPY may not fully reflect Japanese fundamentals, which haven’t in our opinion necessarily moved in favour of a weaker JPY as of yet.”
Further, he adds that things will change drastically if there is ever any BoJ talk of withdrawal from exigent measures as targets which the central bank has set for itself are hit, but for now we believe that sharp increases in Japanese broad money supply growth (which may lead to faster rates of inflation further out) should be viewed as a supportive factor for the JPY cross rates, whilst unexplained weakness in M3 should have the opposite effect, and potentially trigger questions about potential JPY overshoot to the downside. Overall though, for now he still views the pronouncements of Japanese real money investors regarding their overseas investment decisions and the “hard” or anecdotal flows evidence itself as the higher impact factors for the JPY, given the fact that flows are a much bigger force for FX rates than fundamentals over the short-run. He writes, “Flows will also come first given the fact that flow-driven fluctuations in the JPY can actually help the BoJ achieve some of its goals.”