A Note Ahead Of US Jobs Report

The US dollar is sporting a firmer profile against all the major currencies after weakening yesterday. Frequently, it seems the Australian dollar leads the other currencies, and we note that it is making a new low for the week today. Briefly, in Europe, it slipped below its 20-day moving (~$0.7985) average for the first time since December 13.

The US dollar is also recording new highs for the week against the Japanese yen. Many observers have been speculating that the BOJ is tapering or moving closer to the exit. A week ago, BOJ Governor Kuroda told a Davos audience that the inflation target is getting closer. Many participants bought the yen. We took the BOJ’s word that it had not changed policy. The fewer JGBs it was buying was a consequence of the shift to “yield curve control” in 2016.

The BOJ’s actions today should help reinforce its message and this appears to be responsible for the dollar getting closer to JPY110 after have approached JPY108.25 a week ago. The BOJ did two things today. First, as the 10-year yield was approaching 10 bp, the upper end of its acceptable range, the BOJ offered to buy an unlimited amount of 10-year bonds at 11 bp. It did this twice last year.

Second, it increased the amount of 5-10 year bonds it bought in its normal operation to JPY450 bln (~$4.1 bln), an increase of JPY40 bln from its last offering. Recall that in the middle of the middle of the week, the BOJ increased the amount of 3-5 year bonds it was purchasing.

It is also noteworthy that no one was willing to sell their 10-year bonds to the BOJ. The signaling impact and the willingness to buy unlimited amounts steadied the market (generic 10-year yield is off 1.4 bp to 8.6 bp, slightly below yesterday’s low). The reason the BOJ’s balance sheet is not expanding as much as it did prior to the adoption of the “yield curve control” strategy, which is effective primarily through moral suasion and the signaling impact. It requires few purchases.