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22 Mar 2013
Forex Flash: Yen strengthens amidst Cyprus uncertainty - BTMU
FXstreet.com (Barcelona) - Lee Hardman, FX Strategist at the Bank of Tokyo Mitsubishi UFJ notes that the Yen has continued to strengthen modestly in the Asian trading session, driven mainly by a pick up in safe haven demand relating to ongoing developments in Cyprus.
He adds that the ECB announced yesterday that it will suspend the provision of emergency liquidity to Cypriot banks on Monday if Nicosia did not have a bailout plan agreed with the EU and IMF by that date. The hardline stance from the ECB sets a clear deadline for Cyprus to agree to a plan. Additionally he adds that the government is currently scrambling to put together a viable Plan B to reach an agreement with the Troika which reportedly will include the proposal to wind up the country’s second largest lender, Laiki, by splitting into a good and bad bank. In such an arrangement insured deposits under EUR100k would be put into the new recapitalised good bank while the remaining assets including most large deposits would be put into the bad banks potentially wiping out as much as 40% of their value according to an FT report.
Hardman feels that the failure to reach an agreement poses downside risks for the euro and risk assets in the near-term as the withdrawal of ECB support for the Cypriot banks would make them insolvent and the open door to a disorderly euro exit. He sees that the the yen has also strengthened following the first press conference yesterday from the new BoJ Governor Kuroda and Deputy Governors Iwata and Nakaso. Overall, their comments offered little “fresh” insight into future monetary policy direction and Governor Kuroda stated that he will “strive” to achieve the 2.0% inflation target in 2 years. Hardman feels that in order to meet the target they will do whatever it takes which may include: i) bringing forward open-ended asset buying which is currently scheduled to start in 2014, ii) will likely increase quantity and widen composition of asset purchases, and iii) likely drop the bank note rule as not deemed necessary to avoid debt monetization.
He finishes by writing, “However, Governor Kuroda also stressed that foreign bond purchases are unlikely as they would be deemed similar to FX intervention and draw international criticism. When asked about the possibility of the BoJ holding an emergency meeting before the next scheduled meeting on the 4th April, Governor Kuroda did not completely rule out the option. Overall the comments were consistent with the BoJ shifting to a more aggressive monetary easing stance under the new leadership which was in line with current market expectations limiting their negative impact upon the yen in the near-term.”
He adds that the ECB announced yesterday that it will suspend the provision of emergency liquidity to Cypriot banks on Monday if Nicosia did not have a bailout plan agreed with the EU and IMF by that date. The hardline stance from the ECB sets a clear deadline for Cyprus to agree to a plan. Additionally he adds that the government is currently scrambling to put together a viable Plan B to reach an agreement with the Troika which reportedly will include the proposal to wind up the country’s second largest lender, Laiki, by splitting into a good and bad bank. In such an arrangement insured deposits under EUR100k would be put into the new recapitalised good bank while the remaining assets including most large deposits would be put into the bad banks potentially wiping out as much as 40% of their value according to an FT report.
Hardman feels that the failure to reach an agreement poses downside risks for the euro and risk assets in the near-term as the withdrawal of ECB support for the Cypriot banks would make them insolvent and the open door to a disorderly euro exit. He sees that the the yen has also strengthened following the first press conference yesterday from the new BoJ Governor Kuroda and Deputy Governors Iwata and Nakaso. Overall, their comments offered little “fresh” insight into future monetary policy direction and Governor Kuroda stated that he will “strive” to achieve the 2.0% inflation target in 2 years. Hardman feels that in order to meet the target they will do whatever it takes which may include: i) bringing forward open-ended asset buying which is currently scheduled to start in 2014, ii) will likely increase quantity and widen composition of asset purchases, and iii) likely drop the bank note rule as not deemed necessary to avoid debt monetization.
He finishes by writing, “However, Governor Kuroda also stressed that foreign bond purchases are unlikely as they would be deemed similar to FX intervention and draw international criticism. When asked about the possibility of the BoJ holding an emergency meeting before the next scheduled meeting on the 4th April, Governor Kuroda did not completely rule out the option. Overall the comments were consistent with the BoJ shifting to a more aggressive monetary easing stance under the new leadership which was in line with current market expectations limiting their negative impact upon the yen in the near-term.”