Divyang Shah
IFR Senior Strategist
It’s interesting that the Nikkei and USD/JPY have not suffered sharp selloffs despite Fed tapering bets edging higher. The Nikkei is a few points away from a YTD closing high, while USD/JPY has managed to stay above 100.
The real kicker to the upside for both is not expected until end-Q1/early-Q2 next year when the BoJ is likely to deliver further QE as it looks to:
1) mitigate the impact of the April consumption tax hike and
2) to strengthen its commitment to the inflation target as JPY weakness starts having a less flattering effect on inflation.
When the BoJ delivered its bazooka back in Apr 2013, the resulting volatility on JGBs – along with Fed tapering expectations – helped to spark a correction in Nikkei longs and JPY shorts.
The BoJ will be cognisant in how it communicates further easing, looking to limit the impact to the domestic bond market. This time it should be a little easier because the BOJ will be about trying to meet the existing inflation target, as opposed to shifting market expectations toward a 2% inflation target.
In the first half of 2014 we are likely to see Nikkei and USD/JPY extend their winning streaks, so it makes sense holding some OTM calls on both as BoJ policy will remain supportive and the Fed proves to be less destabilising.