Preview: Taking Advantage of BOJ Easing ? Targeting GBP/JPY & CAD/JPY

on April 26 2012 3:37 PM

width=230Release: JPN Bank of Japan Rate Decision Consensus Forecast: <0.10% Previous: <0.10%
Release: BOJ Asset Purchase Program Size Consensus Forecast: ¥5 trillion - ¥10 trillion Previous: -0.5%
Date/Time: 04/26/12 11:30PM EDT (3:30 GMT, 04/27)* *Tentatively Scheduled
Does BOJ Ease Further? Key Question for JPY Crosses

As we approach that Bank of Japan interest-rate decision market participants are eagerly anticipating to see whether the central bank will undertake further monetary easing by adding to its bond purchase program.

In Thursday's session we saw some Japanese yen shorts closed or pared down as various rumors swirled around including one where the Bank of Japan was said to not be considering spending its bond purchase program. But, we should look to the view that Reuters reported earlier in the week that we will in fact have a move by the BOJ.

From Reuters: The Bank of Japan is likely to ease monetary policy on Friday by boosting asset purchases by up to 10 trillion yen ($123 billion) and in doing so may extend the maturity of government bonds it targets to around three years, according to sources familiar with the central bank's thinking.

Therefore, the market is going into the meeting expecting the BOJ to add at least ¥5 trillion more to its asset purchase program. Such a move should weigh on the JPY, especially if it's congruent with general risk appetite - which we saw in the New York trading session.

If the BOJ decides to undertake ¥10 trillion more in bond purchases, that should spark a sell-off in the yen, which would please the central bank as part of its attempt here is to devalue the currency.

Inaction by the BOJ seems remote:

From Bloomberg: Inaction would be a disaster for communication, Atsushi Mizuno, who served on the Bank of Japan board from 2004 to 2009, said in an interview yesterday in Tokyo. All 14 economists surveyed by Bloomberg News before tomorrow's gathering predict Governor Masaaki Shirakawa and his colleagues will boost asset purchases amid forecasts for growth to slow through the year.

Taking Advantage of An Announcement of BOJ Easing - GBP/JPY and CAD/JPY

The best candidates to take advantage of any easing announcement would be the Pound and Canadian dollar which have been stronger against the yen over the last 2 weeks, as these respective currencies central banks' have taken on a more hawkish posture of late.

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The GBP/JPY, seen above has been trading in a sideways range over the last five trading sessions after pushing higher after the BOE Minutes 2 weeks ago. A fundamental catalyst such as the BOJ easing should push the pair above its recent resistance around 131.70 and likely target the highs we had seen in late March at 133.50 - a move of around 180 pips.

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The CAD/JPY has already reclaimed about 50% of its decline from the middle of March to the middle of April and the CAD has strengthened on the back of a more hawkish central bank and the market pricing in a rate hike later this year by the Bank of Canada.

As a result the Canadian dollar has a stronger fundamental bias and if we have a fundamental catalyst where the BOJ does announced further easing - especially the higher amount of ¥10 trillion - the pair here is also likely to push higher towards the 84 level and then the highs from March around 84.90.

We should remember that these moves could be quite swift - similar to what we saw in the middle of February when the Bank of Japan first announced its inflation target and increase its bond purchase program - and we would also want to be cognizant of the sentiment factors which currently favors a weaker Japanese yen (looking at the action in S&P500 in Thursday's NY session).

What if BOJ Doesn't Ease?

If we do not see further easing from the Bank of Japan - which is a possibility - then we don't necessarily have a reason to target these levels for either pair and we would have to trade the Japanese yen based on what is happening in equity and commodity markets and general risk appetite.

In fact the Japanese yen will likely strengthen as the BOJ would lose credibility from market participants that it is determinant to meet its inflation target (of 1%). We would however target some other currencies to long the JPY against - perhaps the EUR or AUD as they have a weaker fundamental bias currently. But, even the GBP and CAD are likely to weaken vs the JPY in such a scenario.

We will cover the reaction to the BOJ decision n our Market Intelligence Briefings which is open to the public.

Nick Nasad is a macro economist, market analyst, and educator; and one of the main contributors to  FXTimes.com - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.

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