At the risk of sounding cold-hearted, it’s been nothing short of hilarious to watch Haruhiko Kuroda and Shinzo Abe attempt to guide the yen lower (weaker).
In what may well go down in history as one of the most ill-fated policy decisions the market has ever seen, the BoJ took rates into negative territory and guess what happened next? This:
Not to put too fine a point on it, but that’s a damn disaster. Think about it: you don’t really associate JPY6 trillion in annual ETF purchases and the monetization of the entirety of JGB issuance and negative rates with a stronger currency.
But the market read the move into negative territory as a tacit admission that the bank’s other policies hadn’t worked. It was a bet that the end is nigh. And indeed it is. But here’s the thing: no one really has any idea whether the yen will continue to strengthen as traders mock and test the BoJ, or whether Japan will eventually get what it wants (and a whole lot more), when the yen suddenly collapses under the weight of the BoJ’s gargantuan balance sheet and/or a move by Abe to enact some kind of Kuroda-funded fiscal stimulus program.
Whatever the case, the market doesn’t seem to think much of the bank’s new plan to manage the yield curve as JPY hasn’t really budged since the announcement and the yield on JGB 10s actually fell 2bps earlier in the session as trading resumed after a holiday.
But let’s say you’re a brave soul and you want to try and trade this basket case (there’s an IMF joke in there somewhere). Here’s Bloomberg’s Richard Breslow to tell you how:
“At this juncture, if you are trying to trade JPY, being nimble and open-minded strikes me as making the most sense. The charts and the evidence are saying it’s not necessary to swing for the fences. The grand scenario will be revealed, but only in due time.”
“There’s nothing obvious to where USD/JPY is going. Even after this week’s central bank fiesta, forecasts of where the currency pair will trade by year-end (not all that far away) are, literally, all over the map. There is no consensus.”
“If you favor the yen, there’s a great trend line from the Jan. 29 spike high, which (coincidentally?) defined the panic high after the BOJ meeting. The trend is your friend, but you probably don’t want that trend-line to be violated in any meaningful way. Fortunately, it’s not very expensively far away. And moving lower every day.”
“If JPY is not your thing, there’s heavy technical and historic support for the dollar from 100 down to the U.K.- referendum-induced year-to-date low at 99.02. Plus you’ll get the added benefit of verbal intervention.”
“Did the BOJ re-write the playbook? We’ll only know in retrospect. Give me 10 analysts and I’ll give you 10 interpretations.”
Here’s one such interpretation from Deutsche Bank:
“At face value the BoJ has undergone a major policy evolution – it has raised its inflation target beyond 2% and shifted from targeting the quantity to the price of money all along the
yield curve. It is notable that both shifts were highlighted as policy options by Fed Chairman Ben Bernanke in his policy blogs this year.”
“The policy instruments are changing, but will it work? Our assessment is that the changes are the outcome of the central bank running out of policy options rather than a proactive shift to new easing. The risk is that the constraints become even more aggravated leading to further JPY strength. We would make three observations in particular.”
Trade accordingly and remember “the moment you doubt whether you can fly, you cease forever to be able to do it”….