Such has been the hype ahead of the 2-day Bank of Japan (BoJ) policy meeting that concludes on Tuesday, US firm Goldman Sach has characterised it as “the most pivotal BoJ meeting since the implementation of yield curve control (YCC) almost two years ago.” What might currency traders wish to look out for? Japan’s Nomura Bank feels that although a formal policy change is very unlikely, there is “a higher likelihood to an announcement/implementation of “operation tweaks” next week, both for Japanese Government Bond (JGB) and ETF purchase operations” and that “a tweak to JGB purchase operations to allow for a wider range of 10yr yields would likely generate short-term volatility of JGBs, which should strengthen [the] JPY.” In such a circumstance analysta the Japanese firm “see downside risks for USDJPY testing 110.” As for economists at Goldman, their view is that the BoJ will “direct [its] staff to devise ways to make the [monetary] policy setup more sustainable for the September meeting” and that “Under this outcome, USD/JPY may decline somewhat further as investors build in expectations for a change in the autumn.” The US firm also wonders if any resultant uptick in Japanese yields could “weigh on rate-sensitive [Emerging Market currencies]” such as, for example, the Turkish lira (TRYJPY). Whether traders have similar expectations of the BoJ meeting, or indeed draw the same conclusions on the impact on currencies from such that kind of outcome, is by definition a matter of conjecture. What does seem clear though is that many analysts (though not all) are expecting ‘something’ from this BoJ monetary policy meeting and, that, on balance the outcome should lend itself to a degree of yen strength at least in the short run. The question traders might wish to consider is how far the yen could run on the topside if the BoJ’s ‘something’ merely matches the fairly low expectations for change of analysts, expectations which traders might rationally presume to have already been factored into JPY exchange rates.
by Neal Kimberley, External Currency Analyst.