Comments and forex-analytics from FBS

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Greece’s deal with private creditors and euro’s prospects

EUR/USD dropped to $1.3180 today amid data that the euro-zone GDP fell 0.3% last quarter from the previous three months.

Time for reflection on the question of the participation of the private sector in Greek bond swaps is running out. Greek Finance Minister Evangelos Venizelos suggested the country is ready to strong-arm private investors into accepting a deal that could have far-reaching implications for markets. He believes that private holders don’t have any better alternative than to submit to Greek terms.

Forecasts on prospects of the common currency differ. Some specialists dissuade from buying euro, because, in their opinion, now the European Central Bank is tied up with tackling the region’s sovereign-debt problem and has no room left to bolster the economy through monetary policy. Analysts at UBS claim that there are still a lot of obstacles on euro's road as even ECB’s President Mario Draghi still regards euro-zone’s economic conditions as fragile. As a result, the specialists are bearish on euro in the medium term. In their view, EUR/USD will slide to $1.25 in several months and hit $1.15 in a year.

However, other specialists believe that if the agreement on bond swaps is reached, there will be no more serious reasons for concern and a decline in short positions on euro may take place.

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March 7: main economic news & events

Australian GDP growth turned out to be lower than expected: 0.4% instead of 0.7% forecast. In the previous quarter the indicator reached 0.8%. As a consequence, the Aussie dropped testing to the level of $1.0500 before recovering to $1.0560.

China's export and import growth is anticipated to slow to around 7% year-on-year in January-February. However, the country plans to adopt measures to help the exporters cope with difficulties such as an insufficient number of orders from elsewhere in the world, rising costs and growing trade frictions. Minister of Commerce Chen Deming said that the passage of a bill by the US Senate to empower the Department of Commerce to impose countervailing duties on Chinese imports is not in line with the rules of the World Trade Organization.

Japan’s foreign reserves fell to $1.303 trillion at the end of February, posting the first fall in two months, as lower prices of U.S. Treasury notes offset higher gold prices. February’s reserves fell from a record high of $1.307 trillion marked at the end of January. The MOF said Japan did not intervene in the forex market between January and February.

Japanese yen held gains from yesterday versus most of its major peers concern about Greece’s ability to complete a debt swap supported demand for the currency as a refuge. Analysts at Sumitomo Mitsui believe that USD/JPY may go down to the 80 yen level and lower. The pair dropped from March 2 maximum at 81.87 to the 80.65 yen area.

In the UK shop price inflation edged down from 1.4% in January to 1.2% hitting its lowest level since March 2010. One of the reasons for this is that the January 2011 VAT hike has dropped out of the comparatives and in part by consumer caution. It is also important to note that the growth in permanent job placements picked up speed in February following the rise in January, which had been the first expansion since September last year. Economists say that the data point to a broad stabilization in the labor market rather than any permanent upward shift in employment.

Greek PSI deal remains in the center of markets attention as the time given to Greece’s private creditors to decide on their voluntary participation in the debt swap runs out tomorrow.

The euro has weakened 3% in the past six months, while the dollar has strengthened 4.4% according to Bloomberg. The yen decreased by 2.3%.

Events to watch

At 8:00 a.m. GMT watch SNB’s foreign currency reserves data. The increase of reserves might be franc-negative.

In the United States one should pay attention to ADP February Non-Farm employment change at 1:30 p.m. GMT (jobs growth’s expected, this index may provide some hints at Friday’s NFP data which is released by the US Labor Department) and January building permits (negative projection). The country is also to publish revised data on non-farm productivity and labor costs, which are important inflationary indicators, and a report on crude oil stockpiles.

To learn more about today’s economic data releases consult FBS economic calendar.

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EUR/USD managed to recover a bit

The single currency rebounded today from the minimums in the $1.3111 area.

Analysts at Forecast Pte note that the market’s speculation about barrier options with a $1.3100 knock-out strike. Holders of these options appear to be buying the euro in order to protect themselves.

Knock-out option is an option with a built-in mechanism to expire if a specified price level is passed. Such option sets a floor or cap to the level which an option can reach in favor of the holder. As knock options limits the profit potential for the option buyer.

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Westpac: recommendations for AUD/USD

Technical analysts at Westpac note that Australian dollar has finally breached its sideways trend as it dipped below $1.6000. The specialists believe that Aussie’s fair value is in the area of parity with its US counterpart.

The bank recommends selling AUD/USD on the rallies to $1.0600. The pair may return to this level helped by global risk appetite. The specialists expect Australian currency to decline to $1.0300/1.0400 in several weeks.

The argument in favor of selling AUD is that the Federal Reserve didn’t hint on more QE. In addition, the analysts observe that Japanese retail investors show no sign of rebuilding their unusually low AUD/JPY long positions after they have taken profits on AUD/JPY’s advance in the first 2 months of the year.

However, for the pair to fall lower, to $1.0200, there should be some really negative news such as Greece’s default.

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What to expect from the BoE's meeting?

The next Bank of England's policy meeting will be held on March 8. Many analysts believe that the asset purchase target is likely to be left unchanged at £325 billion this year and a rate cut is not on the agenda.

According to the forecasts, the first rate hike will be delivered only in February 2014. "With the housing market and wider economy looking weak, there is actually very little scope for raising interest rates as it would almost certainly trigger a double-dip recession," said Phil McHugh, an analyst at trading group Currencies Direct.

Despite the fact that two MPC members wanted to raise quantitative easing purchases by additional £25 billion last month, economists no longer expect any more QE. The shift in forecasts is partly due to the signs the economy is growing modestly after contracting late last year, reduced concerns about Greece's debt crisis and a surge in oil prices.

The MPC’s main task is to use monetary policy tools to try and keep Britain's annual inflation rate close to a government-set target of 2.0%. The latest data showed that Britain's 12-month inflation rate fell sharply in January from 4.2% to 3.6%.

"Most policymakers would probably view the high oil price as likely to have a clear negative impact on growth given weak consumer demand, and thus overall put downward pressure on inflation over the next 2-3 years," said BNP Paribas economist David Tinsley.

Bank of England policymaker Martin Weale said last week that UK inflation may prove more persistent than expected, hinting that it is unlikely the economy will require a further stimulus once the current round of asset purchases ends. This is by far the most explicit indication by an official that the MPC's £50bn increase in stimulus in February could be the last.

However, the economy is recovering only slowly and unemployment remains too high. Inflation is coming down and the main projection is still for CPI to fall below the 2% target level by the end of the year.

British economy shrank 0.2% in the fourth quarter of last year compared with the third, according to recent official data. A further contraction in the first quarter would place Britain back in recession.

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GBP/USD: technical comments

British pound fell yesterday versus the greenback sliding from the levels around $1.5880 to $1.5700. Earlier it failed to overcome $1.6000 level and make a sustainable breakthrough above 200-day MA.

Sterling got under pressure as the markets were in the risk-off mode because of the uncertainty caused by Greece’s deal with private creditors and the reduction of China’s GDP estimate.

Today risk-related currencies including sterling managed to move higher as investors were taking profit on safe havens.

GBP/USD was able to consolidate above $1.5700 (100-day MA). Bearish pressure on sterling will ease if it closes the day above this level. Otherwise, the pair will risk falling to $1.5666 (55-day MA) and $1.5645 (February minimums, strong support). Below the latter, pound will get vulnerable for a decline to $1.5500.

Technical analysts at MIG Bank think that the outlook for the British currency will remain negative as long as it’s trading below $1.5880. If GBP/USD ultimately overcomes this point, it will get chance to rise to $1.5992 (February 29 maximum) and $1.6165 (October 31 maximum).

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BNP Paribas on ECB’s and BoE’s policy

Analysts at BNP Paribas expect the European Central Bank to adopt a 'wait and see' approach. In their view, evaluation of the LTRO effects will take time. If the financial conditions significantly ease, the ECB may decide to leave interest rate unchanged at 1%.

As for the Bank of England, it may keep the rates at the current minimal level of 0.5% until the euro zone debt crisis is over. According to BNP Paribas, this is unlikely to happen earlier than in 2013. In addition, the specialists assume that as the PMIs and CBI show that economic activity in the UK will be at least as strong as the MPC's latest forecast suggests, the central bank won’t expand its asset purchase program either.

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The RBNZ is worried about high kiwi

The Reserve Bank of New Zealand decided to leave the official cash rate unchanged at 2.5% (in line with the forecasts) citing medium-term outlook for inflation (CPI growth rate is seen in the target range between 1% and 3%).

In its statement the central bank expressed concerns about the strength of the national which is caused by the international pressures. The RBNZ underlined that the high value of the New Zealand’s dollar affects the nation’s exports and, consequently, its economic growth.

So, if kiwi keeps trading at high levels on a sustainable basis, the odds of the RBNZ rate hike in the coming months won’t be very high. Even if NZD slowly depreciates, “the Bank expects to modestly increase the OCR over the projections horizon (between now and the end of 2014)”.

The RBNZ Governor Alan Bollard even talked about the possibility of lowering the borrowing costs in response to NZD’s appreciation and the decline in inflation expectations. At the same time, New Zealand’s monetary authorities seem worried about the easing bias adopted by many central banks all over the world as the regulators may start competing with each other making their monetary policy looser and looser.

After this dovish statement was released, NZD/USD declined to $0.8140 before rebounding today above $0.8200 as gains in Asian stocks and prospects for job growth in the U.S. supported demand for higher-yielding assets.

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BMO: trading EUR/USD today

Strategists at BMO Capital Markets expect the single currency to rise today versus the greenback on the positive results of Greek debt deal.

Then, however, the specialists expect the market’s risk sentiment to deteriorate as the central banks (the European Central Bank and the Bank of England) will likely adopt the ‘wait & see’ approach. The ECB President Mario Draghi may reduce expectations for any future long-term refinancing operations.

As a result, the bank recommends investors to sell EUR/USD on the rallies opening shorts at $1.3275, stopping at $1.3380 and targeting $1.2975. The analysts underline that the Greek announcement on private-sector participation may come before the ECB meeting if the percentage will allow the debt swap. In this case the rally would occur earlier and the levels will likely be different.

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Japan: yen’s safe haven status is in danger

The greenback went up versus Japanese yen as Japan posted in January a record current-account deficit of 437.3 billion yen ($5.4 billion) versus 320 billion-yen gap expected. Japanese exports decreased by 8.5% in the first month of the year, while imports added 11.2% rising for 25th consecutive month.

A year earlier, in January 2011, there was a current account surplus of 547.2 billion yen. The previous biggest deficit of 132 billion yen was seen in January 2009 and was caused by the sharp drop of the global demand due to the collapse of Lehman Brothers.

Such a large shortfall raised serious concerns about the nation’s economic and fiscal condition. As a result, yen risks losing its save haven status.

The pair USD/JPY rose from the levels around 81 yen to the 81.50 yen area approaching the recent maximums in the 81.87 yen zone. If the pair manages to overcome this resistance, it will get strength to continue the advance which it began last month. Watch US labor market data later today and tomorrow: US jobless claimed are expected to be almost unchanged at 352,000, while U.S. nonfarm payrolls may have increased in February by 210,000. The greenback is supported by the decreased possibility of more QE in the U.S.

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Aussie may weaken versus loonie

In March Australian dollar is losing ground which it gained versus its Canadian counterpart during the previous couple of months.

The pair AUD/CAD is trading just above $1.0520 (50% Fibonacci retracement of Aussie’s advance from December to February). If the pair breaks below this support, the downside momentum will increase.

Analysts at Westpac analyzed the monetary flows and came to conclusion that the inflow of the long-term investors’ funds in loonie and kiwi has increased, while exposure to Australian currency remains about 25% below its peak registered in the third quarter of 2010. According to the specialists, AUD/CAD may slide to $1.0100/1.0200 in 2-3 months.

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BOC left rates unchanged. Analysts’ comments

The Bank of Canada joined its European and British colleagues in extending loose monetary policy and said the risks are shifting to quicker inflation and away from another recession. The main interest rate remained unchanged at 1%. The BOC pointed that easing global tensions and faster domestic spending may lift prices. Economists said the outlook for the Canadian economy improved significantly.

The Bank of Canada said today inflation will be greater than it was forecasted in January because of “reduced economic slack and higher oil prices,” and that growth will be faster than projected in the January-March period.

Bank AG of Vienna: oil prices may surpass current records of $147 a barrel in the first half of this year because of the “smoldering crisis” in the Persian Gulf. It is important to note that Canada relies on exports for about 33% of its output, and higher interest rates could boost a currency that has traded around parity with the U.S. dollar, harming the country’s competitiveness.

National Bank Financial: A rate hike is expected by mid-2013 as Canada’s output gap looks set to close earlier than expected.

Nomura Global Economics: the BOC is expected to raise rates before the end of the year unless there’s a severe negative shock (household debt burdens have become the most important domestic risk).

Capital Economics: probably there will be an interest rate cut to 0.50% in the second half of the year due to an inevitable housing collapse. Even if the external backdrop continues to improve, the domestic situation will not.

In any case analysts do not expect Canada to raise rates too far ahead of the U.S. Federal Reserve, given that higher Canadian interest rates could drive up the Canadian dollar.

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Comments on USD/JPY

The greenback reached 9-1/2-month maximum versus Japanese yen on the news of Greece's bond swap offer.

On the upside, the pair USD/JPY will now likely test resistance at 81.87 (last Friday’s maximum) and 82.07 yen (100-week MA). On the downside, support is situated at 81.30/22 yen (50% retracement of dollar’s advance from 80.60 and 81.87 yen).

If US Non-Farm Payrolls posts positive result today, American currency will get chance to strengthen, especially versus its Japanese counterpart.

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Euro’s trading on the downside

Yesterday euro had been growing against the backdrop of the successful Greek deal from $1.3150 to $1.3280. In a statement following closure of the offer late on Thursday, the Greek finance ministry said that the amount of PSI participation in the bailout was high enough.

Today the single currency went down to an intraday low near $1.3210 and last stood at $1.3225. Analysts of Sumitomo Mitsui Banking point that it is a sell-the-fact type of reaction and there's some profit-taking.

It seems that the pair EUR/USD has formed ‘head & shoulders’ top in March at $1.3190. The reversal pattern will be complete if $1.3320 (February 2 maximum) managed to hold the pair’s advance. Support for euro is lying at $1.3082 (55-day MA).

Euro will certainly rise if Greece avoids default. Nevertheless, concerns about the implementation of the second bailout will keep affecting the single currency's rate.

Societe Generale: “Our long-term view is still that the EUR/USD will be higher and the relative hawkishness of comments from ECB President Mario Draghi is a reminder that at its heart, the ECB 'wants' to normalize policy while Ben Bernanke 'wants' to buy more protection against disaster”.

Analysts at Citigroup believe that the markets will likely get disappointed by the February NFP figures released today at 1:30 p.m. GMT in USA. In their view, economists are expecting too big increase in payrolls (+209K). According to the bank, the effect from positive data will be limited, while weak readings may provoke stronger reaction.

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Trade recommendations after Greek deal

Greece’s agreement with private creditors and the following ISDA’s decision to admit the Greek debt restructuring entitling to CDS-contracts payments, became the key news events of the previous week. On the back of this deal Fitch Rating agency slashed the Greek sovereign scores from "C" to "RD" ("restricted default").

J.P. Morgan Asset Management strategists confirm that Greece raises serious concerns today. Moreover, there are also risks connected with Portugal or Spain getting infected and the results of the spring elections in France.

However, analysts believe that in the short term Greece is largely resolved due to the ECB support and positive global data including the U.S. nonfarm payroll report. In particular, they recommend buying the euro against the Japanese yen. The euro is going to be helped by better risk appetite, and the yen, meanwhile, is weakening.

J.P. Morgan: The best is to enter the trade at 108.20 with a target of 114.00 and a stop at 105.50.

BMO Capital: If you are bullish on the euro, don't buy it against the U.S. dollar. The yen is the best way to do it because of the massive quantitative easing.

Commerzbank: In the medium term the ECB’s expansionary monetary policy will put pressure on the euro, in particular if the outstanding US data continues to point towards a robust economy thus reducing the likelihood of further US quantitative easing.

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Ichimoku. Weekly forecast. GBP/USD

Weekly GBP/USD

British pound kept declining versus its US counterpart from late February minimum at $1.6000. On the weekly chart GBP/USD closed last week below the Standard line (1), which is currently acting as resistance. The prices will get support from the Turning line (2) which is moving slowly upwards.

The descending Ichimoku Cloud was widening for some time, though Senkou Span A (4) has turned horizontal. As a result, if Tenkan-sen (2) and Kijun-sen form “golden cross” and Kumo starts narrowing, the bulls will get chance to reverse the trend lifting sterling to the lower border of the Cloud (4). Otherwise, the pair will keep moving lower within the current downtrend.

Chart. Weekly GBP/USD

Daily GBP/USD

On the daily chart one may see that the pair’s advance stalled last month and the rate went sideways. Pound failed to overcome important resistance and prices went below both the 9-day MA or so-called Tenkan-sen (1) and the 26-day Kijun-sen (2).

As a result, despite the bullish Ichimoku Cloud (3, 4), there’s no uptrend on the chart. GBP/USD is supported only by Kumo: if sterling enters the Cloud, it will likely dip to its lower border – Senkou Span B (4).

At the same time, the bulls are struggling to retrace at least a part of Friday’s decline and hold the priced above the Cloud.

Chart. Daily GBP/USD

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CFTC data: US dollar longs increased

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that speculative investors increased their net long US dollar position by $6.1 billion (80%) to $15.4 billion.

As you may see in the table below, the greenback was bought versus all IMM (International Monetary Market) currencies except Canadian dollar and Mexican peso. The latter are supported by carry trades and high oil prices. Euro, British pound and Japanese yen are sold due to the loose monetary policy of these nations’ central banks, while Australian and New Zealand’s dollars were hurt by the worsening of China’s economic prospects.

The net positions for American currency are long for 25th consecutive week, the longest period of positive dollar sentiment since 1999.

Chart. Net aggregate speculate IMM position in USD (Source: CFTC, Saxo bank, Bloomberg).

It’s necessary to note that the figures cited above are always a week old at the time of their release. Never the less, CFTC data gives a good oversight into how the market is positioned and if/how these positions are being unwound.

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The Fed's policy will remain unchanged

On Tuesday the Fed's Open Market Committee meets to decide monetary policy. The announcement of further bond buying can pose a risk to a resurgent dollar this week, but most analysts doubt that will happen. Recent stronger-than-expected February employment numbers (NFP +227K) has quelled speculation that the central bank might resort to a third round of quantitative easing (QE3) to stimulate the economy. However, an antinomy is observed: the US labor market seems do better, but this has not been matched by a rise in production, demand or consumer spending.

Many analysts say the FOMC is unlikely to offer new measures to stimulate the economy, especially as the Fed continues with its "Operation Twist" effort to keep long-term interest rates low.

The current “Operation Twist”, a $400bn switch into Treasury securities with longer to run until maturity, will use up almost all of the shorter-term Treasuries that the Fed has to sell and take its holdings of some long-term Treasuries close to limits on market liquidity.

Bank of America-Merrill Lynch: While the FOMC is likely to acknowledge the oil market risk, as well as the general improvement in activity data recently, we anticipate the statement will still be supportive of the current easing bias.

BNY Mellon: Good data will reinforce the Fed's view that what they're doing is working and they're not going to stop now. They seem determined to fight the devil they know instead of the devil they don't.

The chance of an even more-dovish FOMC could once more upend the dollar. The fact that these days the dollar seems to be a safe-harbor from Europe's debt crisis may also help the dollar go up at the euro's expense. On the other hand, investors look forward to Bernanke’s announcements about QE3. The Chairman’s silence of may cause the correction.

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EUR/USD: main technical levels

Technical analysts at Commerzbank underline that the single currency is facing strong resistance versus the greenback in the $1.3291/1.3325 area.

As long as euro’s trading below these levels, the outlook for it will remain bearish. Support is situated at $1.3095 (last week's 3-week minimum), $1.3080 (55-day MA) and $1.3050 (50% Fibonacci retracement from this year's advance) and $1.3000.

EUR/USD risks dropping to $1.2974/54 (February minimum) and $1.2624 (January minimum). If the pair slides below the latter, it will be poised down to $1.2000.

Strategists at Varengold Bank analysts expect to close today below support at $1.3100 citing negative signals from the MACD.

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Banks' forecasts for FX majors

Data were submitted on March 9.

Data from FX Week

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RBS: analyzing GBP crosses

Analysts at RBS claim that the recent strong US data is having a negative impact on the pair GBP/USD because of rate spreads and reduced probability of the Fed’s QE3. In addition, recent dynamics shows that EUR/GBP is also finding itself under pressure.

UK manufacturing data released last week (+0.1% m/m in January after +1.1% in December) shows that GBP weakness isn't rebalancing the nation’s economy. It may also mean that that sterling’s decline can be structural rather than cyclical and further weakness is likely.

According to RBS, GBP/JPY is overvalued by less than 4%, GBP/AUD may be around 4.7% overvalued, while GBP/NZD is estimated to be 2.3% overvalued. The specialists say that GBP/USD and EUR/GBP look fairly valued from a short-term perspective.

The bank underlines that the key driving force of all GBP G10 crosses is rate spreads. The dynamics of pound versus euro, US dollar, Japanese yen, Australian and New Zealand’s dollars is also influenced by significant moves in balance sheets. As for the correlation with risk, it has weakened during the past month for most GBP G10 currency pairs except GBP/USD and GBP/JPY where positive correlations have tightened marginally. EUR/GBP has a positive correlation with risk but this has edged lower since March 5. Further worries over the solvency of Euro zone countries may loosen this correlation further.

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BMO: trading on FOMC meeting

Analysts at BMO Capital recommend investors selling the single currency versus the greenback ahead the FOMC meeting later today. In their view, one should open EUR/USD shorts at $1.3170 stopping at $1.3275 and targeting $1.2875.

The specialists think that the Fed’s Chairman Ben Bernanke will discourage the expectations of QE3 due to the recent favorable economic data, especially employment figures. This is BMO’s baseline scenario.

However, the analysts underline that the Federal Reserve is always capable of surprises and if the central bank hints on further quantitative easing, one should try another type of trade like buying Mexican peso against the greenback.

BMO doesn’t agree with those experts who advise trading emerging market currencies instead of the major ones. The bank points out that the developing nations are aggressively lowering interest rates, so the risk-on, risk-off trading patterns to which traders have got used may be altered.

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UBS, RBS: EUR/USD forecasts

UBS: “US payrolls data were again strong in February, with both the headline figure beating expectations and previous months' seeing decent upwards revisions. Continued employment creation at this pace makes it increasingly hard for Federal Reserve doves to keep pushing the case for further quantitative easing, especially in light of the fact that tail risks associated with the possibility of a European meltdown have been cut back materially. The ECB's successful LTRO operations and the positive Greek PSI outcome have helped in this regard.”

RBS: “Less QE (quantitative easing) in the U.S. is positive for the dollar ... dollar will do better against the yen, euro and sterling. In Europe the weakest data is in the countries with the weakest fiscal position, which is worrying and it's still a case of selling euro on any rallies.” According to the bank, EUR/USD will fall to $1.26 during the next 2-3 months in case U.S. data in the coming weeks is positive.

Credit Agricole: “There's a risk of EUR/USD sustaining a move below $1.31. There are worries about whether Portugal will follow Greece, whether Greece will need another bailout, whether the underlying issues in the country will be resolved.”

Deutsche Bank: “U.S. growth forecasts are being scaled back even as the labor market picks up and that will weigh on the U.S. dollar” – American economic growth is expected to slow this quarter from the fourth quarter's 3% growth (y/y) as consumer spending flattened and exports remained sluggish. However, taking into account euro zone’s problems (primarily, uncertainty about Spain and Italy), the bank’s “baseline scenario remains the euro to drop towards $1.25 in coming months.”

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Citigroup: which G20 currencies outperform others

Analysts at Citigroup claim that while the market players are obsessed with EUR/USD and USD/JPY, a much more profitable trade is to sell G4 majors against other G20 currencies.

The specialists analyzed the average (unweighted) performance of eighteen currencies – Australian, New Zealand’s, Taiwan’s, Singapore’s and Canadian dollars, South African rand, Norwegian krone, Swedish krona, Mexican, Argentinian and Chilean pesos, Indonesian rupiah, Indian rupee, Russian ruble, Turkish lira, Brazilian real, Chinese yuan, Malaysian ringgit – and measured their performance against the average of US dollar, euro, British pound and Japanese yen.

According to the bank, “G20 smalls” have the highest return relative to their realized volatility so far this year. It may be explained by the liquidity added to the market by the ECB and the BOJ which encouraged risk appetite and somewhat stabilized the global economy improving prospects for the smaller countries in the G20 and, consequently, their currencies.

Buying G20 currencies is a way to limit via diversification one’s exposure to risks connected with euro. Such trade is a strong bet on the outperformance of risky assets.

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BOJ refrains from easing, but yen’s outlook seem negative

The Bank of Japan kept monetary policy unchanged at today’s meeting in line with the expectations. The benchmark interest rate remains below 0.1%.

Some traders got disappointed as the BOJ didn’t increase asset purchases after boosting them by 10 trillion yen in February. The Bank of Japan’s decision may be explained by the fact that yen backed off the record maximums, stock markets are showing positive dynamics and the tensions in the euro area eased after the Greek deal.

Instead the central bank expanded by 2 trillion yen ($24 billion) to 5.5 trillion yen a loan scheme aimed to encourage banks to fund prospective growth industries and extended its deadline by two years to March 2014. One trillion yen will be used in a new credit line using the BOJ's dollar reserves to encourage investment and loans denominated in foreign currencies. Such actions aren’t as powerful as QE, but still indicate the central bank’s willingness to help national economy.

Japanese yen strengthened from 11-month minimum versus US dollar after the BOJ meeting’s results were announced, but then dollar-bulls regained power: the pair USD/JPY has initially dipped to 82 yen, but then set daily high at 82.79 yen.

RBS: “The Bank of Japan is basically maintaining its stance of monetary easing after setting an inflation goal of 1%. To clarify its determination to beat deflation, the BOJ could ease policy further as early as late April.”

Citibank: Although some investors got disappointed, “today's decision is not something that can reverse the yen's fall.”

Among the reasons to remain bearish on yen one may name Japan's trade balance switching to deficit, monetary outflows from Japan as Japanese companies are seeking to enter foreign markets and relatively low odds of QE3 in the U.S.