As attention is turning to the BoJ at the end of the week, RBS and Goldman Sachs examine the potential response of USD/JPY to possible BoJ actions. RBS' base case is for no BoJ easing on Friday, while GS sees further easing at this meeting.
"1- If the BoJ stays on hold and only marginally lowers forecasts, dollar-yen will fall sharply back into its recent 115-120 range.
2- If the BoJ is unchanged but significantly downgrades forecasts, dollar-yen will likely be bought on the dip below 119-120
3- If the BoJ eases modestly by only raising ETF, REIT purchases, dollar-yen will succumb to profit-taking and fall below 120
4- If the BoJ eases sharply by raising its ¥80trn a year JGB buying, dollar-yen will trade in a higher 120-125 range," RBS argues.
"We think the probabilities for the BoJ’s four scenarios above are 40%, 30%, 15% and 15% respectively.
-Our base case remains no easing this Friday and a sharp post-meeting bounce in the yen." RBS projects.
"Our Japan economists have long held expectations of easing at the 30 October BoJ meeting on the back of weak activity and declining inflation expectations
-Our base case is for the BoJ to undertake: a maturity extension of existing JGB purchases, an increase in the run-rate of JGB purchases from 80 to 90 JPYtn per year, and an increase in ETF purchases from 3 to around 5 JPYtn, GS projects.
"The call this week is a close one, but even if policy is unchanged at this week’s meeting we think the BoJ will ultimately need to loosen policy as their inflation forecast moves further out of sight – we see further $/JPY upside as a result," GS adds.
"We think $/JPY should move through 125 in the wake of the meeting should the BoJ ease as we expect.
With further upside expected from our base case and with an IOER cut an outside chance, the risk-reward in long $/JPY looks favourable into the meeting," GS advises.
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