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J.P. Morgan On How JPY Reacts To A BoJ YCC Shift in July

JPY
  • The US bank weighs in on how JPY may react to a YCC shift in July. The banks sees less of a reaction compared to December last year, see below for more details.
"We have seen a substantial trend shift in the FX market since last week. Notably, the unwind of USD long positions due to weak economic data and the unwind of JPY shorts mainly from position adjustment. There are also some expectations of monetary policy change towards the July BoJ MPM, especially after an interview with current Deputy governor Uchida last week. Our economists continue to think every upcoming policy meeting will be live, and expect the BoJ to adjust YCC at coming meetings.


We think JPY selling pressure is not likely to become very strong until the BoJ meeting on July 28th. We estimate USD/JPY would move by less than 5 yen. Last December when YCC was widened, USD/JPY went down by around 5 yen to 131 that day, 9 yen lower than the fair value calculated from the 10-year nominal yield gap. Assuming UST 10yr stays at around the current 3.7%, and JGB 10yr goes up to around 75bp (no matter if there is YCC band widening, or removal), fair value would be around 135. As “BoJ attack” (JGB 10yr selling pressure) is not as strong as last year, and people are expecting monetary policy change in July to some extent unlike last December, price action should be more moderate than last year."

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