Morgan Stanley: Time to Sell USD to JPY Exchange Rate Pairing
- Written by: Gary Howes
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Content provided by eFXNews.
One of the most anticipated central policy event of April will be the Bank of Japan’s meeting on the 28th of April.
Ahead of the meeting we see the USD/JPY trading at 111.26, well below where it opened the year towards 120.00.
This strengthening in the yen, combined with lacklustre economic data place pressure on the BoJ to seek ever creative ways to boost the economy and lower the value of the currency.
Clearly strategists at Morgan Stanley are not convinced the BoJ will be able to achieve their desired response.
Hence, they reckon it is time to sell the USD/JPY exchange rate following the April bounce:
"We project a 20bps cut, but with Japan’s banks predominantly funded via deposits it will be the inflexibility of deposit funding costs via retail accounts undermining banks profitability further. Hence, the JPY weakening impact coming from this side should be limited.
"Bloomberg is reporting the BoJ's increasing importance as a shareholder within domestic markets, claiming that, via its ETF purchases, the BoJ is now a top 10% shareholder for 90% of the 225 companies listed in the Nikkei.
“Under the current stimulus plan the BoJ buys JPY3trn of ETFs every year.
“At an estimated JPY8.6 trn as of March, the BoJ's holdings amount to about 1.6% of the total capitalization of all companies listed in Japan.
“That compares with about 5% held by the nation’s Government Pension Investment Fund (GPIF).
"Should the BoJ announce an increase of its ETF purchase program then we would sell USDJPY into strength.
"BoJ's equity market intervention does not generate a JPY weakening flow going beyond initial de-hedging of equity positions via FX instruments. Abe’s ruling party winning a closely fought by-election on the northern island of Hokkaido on Sunday is a positive factor ahead of an upper house election expected in July.”
Morgan Stanley anticipate USD/JPY move to 112.50 post-BoJ should be viewed as a correction within a longer-term bear market and should provide a good selling opportunity accordingly.