Copyright by World Economic Forum. swiss-image.ch/Photo by Sebastian Derungs.
The yen weakened since last week after flirting close to a 17/18 month low earlier in April near the 107 – 108 levels. The steady gain in yen saw many BoJ and government officials issue dire warnings to speculators but fell short of directly intervening in the currency markets.
This week, the BoJ might get a chance to weaken the yen as it meets on Thursday, April 28th. Following Friday’s reports from Bloomberg that the Japanese central bank would offer negative rate loans, the yen managed to ease back across the board. While it is hard to speculate if the yen fell on the Bloomberg reports, one thing for certain is the CFTC’s speculative yen positions, which have hit a record high at $8.20 billion as of last Tuesday, April 19th. The report might have well spooked some of the speculators covering their long positions on the yen.
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However, interestingly big financial institutions remain largely divided. Goldman Sachs is the most bullish on USDJPY, noting that the Bank of Japan would need to reaffirm the markets that the monetary easing course or Abenomics was still on course. Goldman Sachs also noted that it disagreed with the Bloomberg report and said that instead of cutting rates further into negative, the BoJ could focus more on expanding its balance sheet, noting that the currency tended to weaken more on an expansionary balance sheet than negative rates, citing recent examples of the yen’s knee-jerk reaction to the BoJ’s January negative rate cut and also comparing the euro and yen to the stimulus expansions from the ECB and the BoJ respectively.
In this aspect, Goldman says that shorting yen and going long on the Nikkei offered a better risk reward and upped its forecasts on USDJPY to 130.
Joining Goldman Sachs’ view is also UBS which notes that they expect “big easing” from the BoJ on April 28th. In a note, UBS attached at 65% probability for the BoJ to ease policy by adding 20 trillion yen to its quantitative easing program while also expecting a 10bps cut to -0.20% on interest rates. UBS suggested that this would see the USDJPY trade higher as monetary policy divergence comes back into play.
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Meanwhile, taking the opposite end of the view is Barclays which expects that the BoJ is unlikely to take additional easing steps this week and rather opt for the July meeting. VP of research, Shinichiro Kadota notes that with the BoJ fresh from its negative rate cut in January, the central bank would prefer to wait and assess the impact of the rate cut than opt for more easing measures in April.
USDJPY has been in a steady decline and so far the yen remains a key “sell the rallies” trade. While there is potential for an imminent bearish reaction from the yen should the BoJ indeed ease policy even further, it is anyone’s guess as to how the USDJPY trade will unfold thereafter especially if the FOMC strikes a hawkish tone in the markets, which could see a return to the divergence trade that could potentially benefit long positions in USDJPY.
Following the BoJ’s decision consumer prices from Japan are due for release tomorrow followed by US GDP estimates, all of which could bring significant volatility in the markets.