BOJ steps in, Fed looks set for March - Nomura

Analysts at Nomura explained that the persistent dollar weakness Risk markets wobbled this week around month end, but have largely stabilised.

Key Quotes:

"The Fed struck a marginally hawkish tone at this week’s FOMC meeting, adding “further” gradual tightening is needed to the statement. Nonetheless, our economists reiterate their view for three hikes this year (March, June and September).

The dollar has had a rough January, and we continue to stick to our short USD bias. A key medium-term driver of dollar weakness, the current account deficit, is starting to kick in. In Q4, the US trade deficit widened sharply and leading indicators suggest the deficit will worsen over this year. On top of that, it appears that the US administration is now keen to flex its protectionist muscle. This all comes at a time when the US fiscal balance will likely worsen.

Already, the sum of the fiscal and current account balance, the twin deficits, has crossed the 6% of GDP threshold which has coincided with major multi-year downtrends in the dollar. The BOJ has stepped in following Kuroda’s optimistic comments last Friday at Davos.

This week, the BOJ increased its 3-5yr JGB purchases for the first time since 12 July last year to JPY 330bn from JPY300bn. BOJ Governor Kuroda went against his Davos remarks this week, repeating that there is long way to go to achieve the 2% price target and the Bank will persist in its easing.

After his communication mistake in Davos, he repeated that inflation was on the weak side at the moment. However, to show the BOJ’s unchanged dovish stance and help USD/JPY recover, bolder action (fixed price operations) may be necessary. We continue to expect EUR/JPY to move higher, with the BOJ likely to remain dovish while the ECB approaches normalisation.