I got rolled for 2% on short trades in AUD/JPY, NZD/JPY as well CAD/JPY taken early yesterday afternoon, as Nikkei jumped a massive 720+ points on the Bank of Japan’s announcement. I can’t say I’ve seen a move like that in a long time.
Some of the incredible highlights include:
- Bank of Japan will double its monetary base thru JGBs and ETFs in 2 years.
- Merge asset program with regular bond buys
- Purchases of assets extended from 3-year maturities to 7/8-years maturity
- BOJ will buy over 7 trillion yen worth of bonds each month.
- Target on bond buying would expand monetary base to the point of reaching Y270 trillion by 2014
- Decision to keep ultra-easing policy until 2% inflation is achieved sustainably
Car makers in the U.S can’t be happy about this, as Japanese exports just keep looking cheaper and cheaper. The BOJ’s plan has them buying everything but the kitchen sink in order to reach the inflation target of 2%.
From a trade perspective – something to be learned here, as my position long JPY was “counter trend” ( medium to long term I am extremely bearish JPY) and I was holding positions going into the meeting and announcement ( assuming we’d already priced in / understood BOJ’s easing). This lends further credence to keeping small position size when trading against the macro trend…and of course when trading against a Central Bank.
I still associate “buying of JPY” ( a safe haven currency ) with “risk off” behavior, and will watch closely to see if this “spike” in Nikkei – takes a roll of it’s own.
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You are right the majority of the BOJ was mostly priced in, but the pricing in occurred toward disappointment. Expectations were the new head of BOJ would not be able to get a coalition together to do everything he wanted at this meeting. Instead it was somewhat discussed that he would have to do it in a piecemeal fashion.
The risk on – risk off feature of the fx market since 2008 has somewhat dissipated at the start of this year. The correlation broke down even further in February when looking at the dollar index and the S&P 500. FX has been acting strangely this year because what was working the past few years is definitely not working as well. Like Aud and NZD acting as a “safe haven” currency.
On a side note: What will be interesting is what plays out if the BOJ is successful in driving inflation to 2%. At that point it might be more expensive to use the Yen as a carry trade currency, rather than the dollar or even the Euro. Also, what will happen to Japanese pensions, insurance companies, and banks? They are all sitting on a massive position of JGBs on their books. Driving inflation higher would cause heavy mark to market losses on those entities. The question is: how much pain will the BOJ force upon these entities in trying to achieve their goal of 2% inflation? Likelihood is not much.
SHINZO!
Fantastic input Quantic – thank you.
The currency war playing out can only end badly – and there is no question that Japan is most certainly walking the razor’s edge.
With all the liquidity sloshing around, it’s been a roller coaster ride currency wise – to say the least!
Thing is – we’ve still not seen any real “safe haven flows” as markets are continually bouyed by CB stimulus/printing world wide… so it has been difficult to see “who’s gonna take the lions share” – when risk aversion really hits hard.
Long term fundies JPY is still a big candidate, but as all paper fiats essentially “take a bath” here soon – the IMF’s “SDR’s” come to mind….as well physical gold.
This is what I love about the currency markets…..a front row seat at the human theatre – with special guests “fear” and “greed”.
It’s unreal…..the incredible blast lower in Yen while the majority of market signals risk coming off.
$tran rolling over, Appl face down, TSX/Canada dumping, stocks weak.
I’ve been lookin at “blow off top” type move here for a while….and wow Nikkei could be the tell?