USD/JPY at a high, will the BOJ react? - Nomura

Analysts at Nomura explained that the USD/JPY broke above 113 and is trading at its highest since early January. 

Key Quotes:

"US yields are rising albeit gradually, while risk sentiment has been supported by the recovery in global economic data (JPY buying to hedge against an escalation of the trade war is also likely to moderate for now. In terms of domestic investor flows, we are sceptical of aggressive USD buying from lifers to lower their FX hedge ratio at the recent level of USD/JPY, but aggressive foreign equity purchases by Japanese investors are attracting market interest."

"As JPY weakens, market interest in any reaction from the BOJ is rising gradually. Before the next meeting on 30-31 July, the BOJ’s rinban operations to purchase 5-10yr and 10yr+ JGBs tomorrow are important. In the judgment of our rate strategy team, hopes appear high for a cut in super-long JGB purchases."

"Although we also expect the BOJ to reduce its JGB purchases tomorrow, if the Bank did leave the amount unchanged, we would expect JPY weakness to accelerate further, as the decision suggests a cautious stance by the Bank. If the Bank reduces the amount of JGB purchases, any short-term market reaction to the stealth tapering is worth monitoring."

"As USD/JPY has traded strongly, short-term profit taking and USD/JPY dip are possible. However, after the stealth tapering conducted three times in June, FX market reactions were fairly muted and short-lived."

"If the muted reaction continues immediately after the stealth tapering announcement, dip-buying demand should emerge and the trend of USD/JPY appreciation would sustain further. "

"We also view the July BOJ meeting as an important event risk for JPY trading. We believe the medium-term implication of the July meeting is JPY negative, while we monitor for any possible measures to alleviate negative side effects. For this week, we are also looking to weekly international portfolio investment flow data on Friday, as investor interest in active Japanese investment in foreign equities is rising. If Japanese foreign equity buying remained aggressive last week, it would be viewed as a sign that the room for dip buying is limited in the near term."