Market Analysis

Kuroda’s Zurich Speech: Dropping A Hint?

Data released on Friday by the US Commodity Futures Trading Commission (CFTC) for the week ending November 14 showed, as Reuters reported it, that speculators’ net short position in the Japanese yen reached its biggest since December 2013. In plain English, as at Nov 14, traders whose positioning is measured by the CFTC were still looking for a weaker yen. Of course some of that positioning might have been washed out in the latter part of last week. After although USDJPY opened at 113.46 in Tokyo on November 15 it tracked down for the rest of the week closing at just above 112.00 in  New York on Friday. Yet the fact that the yen traded stronger over the second half of last week doesn’t necessarily make redundant arguments that the yen should be weaker versus the US dollar over coming months. What might however give yen bears pause for thought would be any sign that current Bank of Japan policy (BOJ) settings might be tweaked. Buried deep in a speech made in Zurich on November 13, BOJ Governor Haruhiko Kuroda mentioned the “reversal rate,” explaining that “this refers to the possibility that if the central bank lowers interest rates too far, the banking sector’s capital constraint tightens through the decline in net interest margins, impairing financial institutions’ intermediation function, so that the effects of monetary easing on the economy reverses and becomes contractionary.” Kuroda stressed that this was not yet the case in Japan but that the BOJ will monitor the situation.

But as Mitsubishi UFJ Morgan Stanley said on Friday if the BOJ’s “official position is that Japan has yet to reach the reversal rate,” “why did Mr. Kuroda take this opportunity to discuss the limitations of monetary easing?” Traders might wish to see if similar comments, made by Kuroda in Switzerland, start to crop in speeches made in Japan. If they do then the remaining Bank of Japan policy meetings in fiscal 2018 might assume a greater market focus. Those are scheduled for December 20-21, January 22-23 and March 08-09. With the terms of two BOJ deputy governors expiring on March 19 and a likely desire to try and ensure a smooth end to Japan’s financial year on March 31, if the BOJ did decide to tweak policy this Japanese fiscal year then it would likely have to occur at either the December or January meetings. It’s an outlier prospect but traders might want to save the dates.

Written by Neal Kimberley, External Currency Analyst.