The Bank of Japan Takes Center Stage
The Bank of Japan scraps the ceiling for buying corporate bonds. But the BOJ was not buying anywhere close to the limit anyway because, under the YCC framework, they haven’t needed to; they haven’t been bumping against any quantitative limits.
Furthermore, bond buying and QE-type announcements have had zero currency impact around the world anyway. See the US, Canada, Australia, etc. New Zealand is open to outright monetization, and NZD does not even care!
Positive for risk
The Nikkei is holding onto its 2.5% gain since the open, and the SPX touched 2850 which supports the market’s thematic risk-on sentiment view suggesting risk assets should get endorsed this week by central banks signaling a willingness to expand existing asset-purchase schemes.
Currency implications for the JPY
Of the major central banks, the BoJ has the least scope to expand policy, given the constraints around where JGB yields are already trading. That leaves USDJPY downside attractive, especially if the FED pulls another policy rabbit out of the hat.
How Asia Fared
Asia's equity markets are starting the week on a firm footing. In FX, more positive risk sentiment is translating into a weaker USD, with AUD and KRW leading the charge.
Front-month WTI is an outlier, however, falling $-1.25 in thin trading this morning. Weaker oil prices have been a feature of recent Mondays, but this is very much a front-month WTI idiosyncrasy.
Oil is trading lower on the general bearish narrative around "Tank Tops," and as market makers skew LHS as the street continues to pare June contracts either by liquidation or through Jun-July rolls. Welcome to the new world order of oil trading, as sad as that may be.
Prices further along the futures curve are better supported, while December is down only -.47 cents.
For now, rapidly-filling oil storage is being interpreted as a US-specific issue, which explains why even the oil-sensitive AUD and MXN are rallying at this point.
At the turnover to London
The markets are bolstered today by central banks who can support risk sentiment this week by signalling a willingness to expand existing asset-purchase schemes, if conditions warrant, as markets position for CBs to wax dovish.
The S&P 500 is up ~27% from Mar. 23 lows. By contrast, the UST 10y yield is the only 6bp above the closing low for Mar. 9. The combination of persistently low yields and a substantial equity market rally suggests investors expect central banks to keep balance sheets at these startling levels.
If this plays out on script, Asia EM equities and FX should bounce. In Asia, IDR is well placed in this context, while INR carry is getting more attractive, especially with low oil prices. In G10, the AUD is the pick of the bunch to rally on this dynamic, as well as benefiting from a normalizing China.
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Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies