Traders Bet Dovish Bank of Japan to Capitulate After Swiss Shock
Comment of the Day

June 16 2022

Commentary by Eoin Treacy

Traders Bet Dovish Bank of Japan to Capitulate After Swiss Shock

This article from Bloomberg may be of interest to subscribers. Here is a section:

A Small BOJ Policy Change Should Have a Large Ripple Effect While Japan’s policy makers are expected to continue with monetary easing, there’s growing speculation in global markets about the potential for a shock decision. The BOJ has been keeping a lid on government bond yields since 2016 and defending that cap vigorously in recent days, but pressure is building to either alter its policy stance or give guidance on when that will end after the Federal Reserve’s biggest interest-rate hike since 1994. The yen rallied as much as 1.1% Thursday.

“As the BOJ is now the last central bank standing as regards easy policy, it’s unsurprising that bets against the BOJ are building,” according to Jeremy Stretch, head of G-10 foreign-exchange strategy at CIBC. While Stretch expects the central bank to stick with its current policy, “any suggestion of an adjustment to the YCC threshold would result in a material bounce in JPY valuations,” he wrote, referring to yield-curve control, in a note published Thursday.

Eoin Treacy's view

The Dollar began to ease today as the risk of recession rises and other countries join the Fed in raising rates. The surprise more by both the SNB and BoE begs the question how long the BoJ can hold out against rising inflationary pressures. They will certainly be among the last to raise rates.

The Pound is bouncing impressively from the $1.20 area. The Swiss Franc rebounded impressively from parity versus the Dollar and even the Yen looks likely to unwind its short-term oversold condition.

Gold has been rangebound against the Dollar for most of the last year even as it broke to new highs against a host of international currencies. Dollar weakness could easily act as a catalyst for further strength.

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