HSBC: Three scenarios for USD-JPY

From the FXWW Chatroom: We consider three scenarios for the BoJ – disappointment, greater monetary stimulus and “helicopter money” – and highlight the key FX implications of each one. For the first two scenarios we would expect the medium term impact on USD-JPY to be limited, although the short-term reaction would likely be different. Only a shift towards a much more dramatic measure might be enough to change the trend for USD-JPY.

Scenario 1: No easing, disappointment
USD-JPY sharply lower on the announcement. An unwillingness to pursue further monetary expansion alongside a lack of market fear around FX intervention would be likely to see USD-JPY fall.

Scenario 2: Easing delivered
USD-JPY likely to spike higher, especially if easing was at the upper end of the economists’ forecasts. There may be confusion around the announcement as there are many possible parameters the BoJ could alter in this scenario. Key near-term resistance would be at 107.49. But simply doing “more of the same” would not change the overall outlook for the JPY. We would be looking to sell USD-JPY on the spike after the announcement.

Scenario 3: “Helicopter money” announced
Much higher USD-JPY. This would be a major shift in policy stance and a much more comprehensive easing. A permanent addition to the monetary base would create much larger headwinds for the JPY with concerns rising about a debasing of the currency’s value. If it were to happen, this outcome could shift the medium term path for USD-JPY higher, following the initial jump.

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