BoJ twist may wind equities, bonds and JPY in a declining trio – AmpGFX

Greg Gibbs, Director at Amplifying Global FX Capital, suggests that the BoJ appears to be massaging market expectations towards expecting a policy announcement on 21 September designed to lower short-term yields and raise long-term yields in Japan (‘operation reverse twist’). 

Key Quotes

“This could be achieved by lowering the NIRP and adjusting the JGB purchase program to buy less long-term bonds.  Recent speeches by BoJ Governor Kuroda and Deputy Nakaso provided the rationale for the twist, and press reports today channeling BoJ insiders more pointedly suggest this will be the result. 

We see the recent rise in global bond yields that continued Tuesday despite a much more dovish than expected speech by Fed Governor Brainard on Monday, as driven by this evidence of a BoJ twist.  However, surveys and market commentary by Japanese analysts suggest that sentiment remains divided. 

The market overall still seems to somewhat favor a stronger JPY, retaining its year-long rising trend.  USD/JPY is trading in the middle of a wide but narrowing range.  We see risk to the upside in USD/JPY in response to a BoJ twist, potentially breaking the pair out of its downtrend this year. Higher long-term Japanese yields would be reinforced by a weaker JPY and potentially drive global yields much higher. 

Higher global bond yields are spilling over to a correction in global asset prices and weaker emerging market and commodity currencies.  Traditionally, weak global asset prices tend to support JPY (seen as a safe haven).  However, the USD has been the preferred funding currency for higher risk investment this year.  As such, just as it is unusual to see bond and equity prices fall at the same time, we may see the JPY join the fall, and a broad rebound in the USD, regardless of if the Fed hikes rates in coming months or not.”