Stocks rallied modestly. Europe is wildly overbought:
SPX
This week’s news is dominated by Japan and the BOJ. Barclays (LON:BARC):
BOJ
Further BoJ policy changes could pose upside risks to the JPY of as much as 5%, with the BoJ leadership change and wages remaining in focus.
Second-round effects of BoJ policy changes via changes in global portfolio flows could further support the JPY and exert tightening pressures on the xccy basis.
•BoJ’s YCC adjustment in December accelerated the USDJPY decline that was already underway following the FX-intervention-driven peak in October 2022. The surprise nature of the December decision is keeping market expectations high for further policy changes, even as soon as next week; hence, they en appreciation pressures.
•Our estimated impact of further BoJ policy adjustment points to potential JPY appreciation of up to 2.7%, but we believe the risk is for a larger reaction–potentially double in size.
•In assessing the BoJ policy outlook, its upcoming leadership changes and the spring wage negotiations are likely to be the key determinants, in our view.
•Furthermore, second-round effects of YCC removal via changes in global portfolio flows could provide further support to the JPY and exert tightening pressures on the xccy basis, in our view.
WAGE GROWTH
The initial move to widen the YCC band seemed to me more precautionary than decisive. Especially since it was accompanied by increased QE.
But, if the BOJ were to pursue further reform then the shift becomes a trend and JPY upside plus DXY downside will intensify, potentially blowing away all support levels.
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