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Morning Adviser Asia 8/29/2010 11:18:00 PM

BoJ To Meet?

By Geoffrey Yu

Markets are set to begin the week on a more positive note as Fed Chairman Bernanke's Jackson Hole speech just about provided the reassurance needed under current circumstances. US equity markets ended Friday on a high note as Bernanke did not rule out further balance sheet expansion, saying that "the committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly". However, he chose not to set out the benchmark for further QE, noting that the "specific criteria" had not been determined yet. Our economists note that his speech gave no signal for near-term change in policy and this would probably be enough to prevent any major downside in the dollar.

Although the US economy is going through a softer patch than expected, additional stimulus is probably unwarranted so soon after the August FOMC meeting, where a shift in policy was already signalled. As such, we expect the Fed to remain on data watch for the coming weeks, beginning with payrolls ahead, which is expected to remain soft (UBSe. +75k, cons. +47k). The FOMC minutes and manufacturing ISM are also due. We expect EURUSD to remain range-bound in the near term, while investor focus this week will probably shift back to USDJPY where the Japanese government appears inching ever-closer to acting to push the pair higher. There is wide talk of an emergency BoJ meeting today as BoJ Governor Shirakawa arrived back in Japan ahead of schedule. Ahead today we expect markets to be somewhat quieter as it is a bank holiday in the UK.

EUR

Targets: EURUSD 1m 1.2800, 3m 1.1500

ECB President Trichet spoke at Jackson Hole last Friday week but offered very little in terms of policy guidance and spoke more on the longer-term economic prospets for the Eurozone. Trichet again warned on the need to reign in imbalances and government debt levels.. The ECB meets this week and we, along with consensus, expect an unchanged policy rate and do not expect officials to announce any new measures. But it will be interesting if they mention any extension of liquidity operations, particularly following ECB Governing Council member Weber's comments on the 3-month liquidity operations. Sentiment surveys are due across the Eurozone today. We remain short EURCHF as a trade recommendation..

JPY

Targets: USDJPY 1m 85.00, 3m 95.00

BoJ Governor Shirakawa arrived back in Japan ahead of schedule, raising the prospect of an emergency BoJ meeting today. The central bank is widely expected to expand its loan facility but it cannot set intervention policy. PM Kan is also expected to meet Shirakawa early this week. Prime Minister Kan noted on Friday that the government would take strong steps to tackle the rise in the JPY and these measures would be announced on August 31st. This is the strongest signal yet that action will be taken but investors were not impressed, as the sense of urgency is still not present and investors remain doubtful over how effective any action could be. On the data front, industrial production and retail sales are the key releases this week.