BoJ and US politics: It’s thinking time – ANZ

Research Team at ANZ, suggests that this week is a pretty quiet week on the data front across the G3 and locally, affording some time for quiet thought.

Key Quotes

“Your humble author’s thoughts are dominated by several themes – the two most topical being what the BoJ’s new policy means, and whether US politics has the capacity to stall markets for the next six weeks. On the latter, at first cut, the answer feels like yes. The way USD/JPY jumped around during yesterday’s debate shows that FX markets have a strong view on the “better” candidate. So while it’s neck and neck, expect volatility within existing trading ranges, with few prepared to stick their necks out and go full bore one way or the other. In that world, currencies like NZD are likely to be in a sustained mild updraft (albeit with similar volatility).

On the former; two things spring to mind: the first is – now that 10yr JGBs have corrected “higher” to 0%, they won’t go any higher (or lower) now that the BoJ is anchoring them there. Boom! No point owning them – they offer no accrual and no capital gain potential. So what do you buy? More negative yielding shorter JGBs? No, you look elsewhere (NZ!) where yield convergence still has some way to run. Remember too, the BoJ is still buying the same nominal value of bonds each month, so the next “soak up” is ongoing. Buy bonds, wear diamonds!”