The Bank of Japan is expected to decide to maintain current monetary policy at today’s monetary policy meeting, but Governor Haruhiko Kuroda’s stance of continued easing will prompt further yen buying intervention by the monetary authorities and market bets on a rise in bond yields yen. ‘Will just put it on.
Traders appear to be preparing for at least a short-term rally in the Yen, with rate markets showing the benchmark 10-year government bond yield well above the allowed range of the Bank of Japan’s (YCC) Yield Curve Control.
Bloomberg polled 49 economists.All those questioned expected the BOJ to maintain the current position in terms of monetary policy at this meeting. The results of the meeting, which will be announced on Wednesday, have increased the pressure in various markets as the government and the Bank of Japan moved to protect the Yen and the YCC.
currency options
Currency options indicators show that traders are taking seriously the threat of intervention from the authorities to buy the Yen. In terms of risk reversal between the dollar and the yen, longer maturities are closer to neutral, while one-week maturities are turning sharply negative, showing strong moves in preparation for a stronger yen.
This appears to reflect the view that the Japanese monetary authorities will move to intervene if the Yen weakens as the Bank of Japan continues to ease, but analysts expect the Yen to rise There is also the possibility of betting move on policy review shock .
Options market tips moving to prepare for yen appreciation due to Bank of Japan meeting and intervention warning
yen interest rate swap
The 10-year yen exchange rate climbed to 0.67% last week, the highest since 2014. The BOJ’s 10-year JGB yield is well above the 0.25% upper end of its permissible range, suggesting that at least some investors are expect the BOJ to be forced to review or abandon its YCC ing policy.
negative interest rate policy
Overnight index changes continue to indicate that the BOJ will raise its short-term policy rate to minus 0.1% as early as April 2023, when Kuroda’s term ends. Newly issued Japanese government bonds have yields above zero for all maturities except two years.
regime change
Exchange market factors in canceling negative interest rates after Kuroda’s retirement
source: Bloomberg
“We don’t expect the BOJ to act at its October meeting, but there is a risk it could send a more aggressive signal,” TD Securities strategist Priya Misra said in a note. there is a high possibility that the YCC policy will be changed.”
Liquidity decline
The BOJ’s tight control over the bond market, which recently increased its government bond purchases on March 26, has prompted investors to abandon aggressive bond trading. The Bloomberg indicator shows that Japanese government bond yields deviated the most from model estimates in more than a decade, suggesting a lack of liquidity for arbitrage investors to take advantage of market distortions.
Rising hedge costs
Three-month yen-dollar hedge costs, calculated by Bloomberg, have risen to nearly 5%, the highest since 2008, during the global financial crisis. The rising hedge costs have further strengthened the pressure to buy the dollar and sell the Yen on Japanese importers, who are gaining influence in the foreign exchange market, triggering the yen’s depreciation.
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