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GBPJPY: BOJ MISS; BOE HIT? MORE SELLING ON THE HORIZON

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BOJ Miss:

1. BOJ deliver one of the biggest misses in history (vs expectations/ pressure) - only increasing ETF purchases and dollar funding by apprx 60bn annual in total vs 10-20bps of Depo and LSP cuts + 5-20trn in QE increase + ETF increase.

*See attached post for in-depth detail on the BOJ situation and price action history/ Yen strength/ Safe havens*

BOJ Miss Compounded with a BOE Hit:

1. BOE are expected to ease by 25bps and possibly add 50bn to their QE programme on Thursday - a BOJ miss combined with a BOJ hit should cause compounded losses for GBPJPY as there are two drivers - Yen should continue this week to get stronger (as BOJ easing expectations surpass and Yen strength increases) whilst GBP gets weaker as the BOE on Thursday likely takes action, reducing the value of Sterling - with both providing the optimal environment for downside.

- Historically, when BOJ has delivered new policy/ missed GBPJPY has sold off aggressively between 2-8days and 700-1200pips. Now whilst I dont expect the same level of aggression in the near-term as the relative value is much lower now (135 vs 175) so moves lower should be smaller - I do expect that 400pips lower on the day is not the end of the selling rally for GBPJPY.

- Initially at the start of the week i expect GBPJPY to move lower at least another day (satisfying historical moves), perhaps into the 133.5 level which would be 550pips, lower than the smallest sell-off but fair given the relative value changes - not that i would be surprised to see more.

- Later into the week is when I expect the bulk of GBPJPY losses to come (e.g. Thurs/ Fri) - the reason for this is as 1) any Yen downside risk from the MOF releasing upside in the details of their stimulus package would have surpassed e.g. increased stimulus from 28trn-40trn (unlikely) or increased govt spending section - both of which devaluing yen moving gbpjpy potentially higher. Though I think the risks are more skewed to MOF delivering a package that strengthens JPY as it undershoots expectations as several MOF members have mentioned the package being over several years - the more years the less punch the package has (given some expected it (5% of gdp) to be spent in 1yr), equally the less direct govt spending portion of the package will also lessen the depreciative impact on yen (rumoured to be 13trn, if less then Yen could get considerably stronger). As mentioned I see the MOF release to be asymmetrically skewed to expectation downside for these reasons.
2) BOE GBP selling pressure would happen when they cut the rate and adjust their QE programme - this is a highly likely scenario as BOE MPC Minutes in July said "Most members expect to loosen policy in August" and recently the BOE's biggest hawk M. Weale switched stance in light of UK Business PMI/ Optimism prints at 10yr lows saying the BOE needs to act fast/ delaying policy further doesn't make sense.

Trading strategy: Sell GBPJPY Mrkt 133.5TP1 130.5TP2 128.5TP3 - risk averse traders could wait for the 50-60% MOF/ general Vol bounce into 136-38 level before shorting - I would reshort here anyway.

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Trading Strategy:

1. Selling GBPJPY at market isnt a bad trade, there is easily 150pips to the 133.5 level before we could see a bounce (we could even gap on sunday into/ past this level which would be good). Especially when we look at history and the level of this BOJ disappointment i.e. history has moved us 600+pips lower and sold for several days when the BOJ has offered moderate easing (Jan) - let alone this July when the BOJ meeting missed massively (shy of annual 60bn in ETF/USD funding, which the BOJ doubles in QE in 1 month) so if there is yen buying momentum to 600pips+ and a selling period of several days - as we have seen in history - it should be now. So we should expect to see more red consecutive dailies as we have in the past. The only downer is the lower relative value but i still think we see selling at least one more day (2 total) before any upside, which then will be limited to Thursday assuming the BOE delivers what the market expects/ they have said.

- GBPJPY has very high volatility + GBP is holding its strength well as central bank confidence in general trades very low (many disappointments) + JPY MOF may provide some JPY weakness - so these factors in mind we could see a bounce into anywhere between 136-140 (RHS especially if any BOE MPC members release any hawkish comments) - I advise selling this bounce as well as selling at market on sunday, or you could just wait for the bounce which id say is 60% likely to happen.

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UPDATE:

1. Some Bearish UJ bias coming in from JPY Officials/ GS:

- MR YEN SAKAKIBARA: ABE STIMULUS PLAN WON'T HAVE A MAJOR IMPACT 100 YEN LEVEL NOW EYED

- JAPANESE PM ABE ADVISOR HAMADA REITERATES OPPOSITION TO HELICOPTER MONEY

2. GOLDMAN: RISK RALLY DRIVEN BY COMBINATION OF LIGHT POSITIONING INTO BREXIT AND SEARCH FOR YIELD

-Risk Appetite Indicator Now Neutral, Suggests Markets More Vulnerable To Growth, Policy Disappointments

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UPDATE:

3. Japan’s Shirai: It's better for BOJ to wait until December - forgoing the September meeting will certainly put more topside pressure on Yen; especially given July was meant to be the delivery, logic would say september would be the next date. Though given their reluctance to ease in July, there is no pressure in my opinion to ease in September either. Further BOJ action is likely to be sold aggressively as this is the 2nd time the BOJ have let down expectations massively.

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UPDATE:

1. JAPAN FINMIN ASO: NO COMMENT ON FX LEVELS

2. JAPAN FINMIN ASO: RECENT FX MKT SHOWS EXTREMELY NERVOUS MOVES

3. JAPAN FINMIN ASO: NEED TO CAREFULLY WATCH FX MOVES

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UPDATE - Expected fiscal package from JPY MOF by BBG, seen at 7trn below expectations of 10trn+

1. Actual spending will only make up about 7 trillion yen, according to a person familiar with the matter, with the rest consisting of loans and other financing, probably spread over several years. The package is the latest in a long series that have had limited impact on the economy, while Abe’s promise to make structural reforms -- tackling areas like immigration and employment regulation -- has fallen short of expectations.

- bloomberg.com/news/articles/2016-08-01/japan-set-to-give-details-of-28-trillion-yen-stimulus-package

2. Hopefully these claims are true, 7trn is much below the expectation of 10trn-13trn and should certainly help yen and £yen grind lower today.

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UPDATE:

1. Meanwhile in Japan, the Nikkei Stock Average was down 1.3% as investors awaited details of Prime Minister Shinzo Abe's much-touted 28 trillion yen ($274 billion) stimulus plan, which will rank as the largest supplemental government spending package since the global financial crisis in 2009.

- But actual new, direct spending will total only about Y7.5 trillion, spread out over two years, people familiar with the situation said earlier. That would be less than the Y10 trillion package Mr. Abe introduced in his first year in office.

WSJ Reports

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UPDATE:

1. JAPAN FISCAL MEASURES COMPRISE 7.5 TRLN YEN IN NATIONAL, LOCAL GOVT SPENDING, 6 TRLN YEN IN FISCAL INVESTMENT AND LOANS -GOVT

2. JAPAN PM ABE'S CABINET APPROVES FISCAL MEASURES WORTH 13.5 TRLN YEN IN STIMULUS PACKAGE TOTALLING 28.1 TRILLION YEN -GOVT