The two-day monetary policy meeting of the Bank of Japan is underway. The BOJ is expected to declare its interest rates in the mid Tokyo hours (near 0300 – 0430 GMT) on 15-June. It is widely expected to keep the interest rate (the uncollateralized overnight call rate) unchanged at 0.50%. The last time the BOJ had met was on May 17-18 and had kept rates steady.
The last interest rate change was on 21-Feb-07 when rates by had been raised 25 Bps to 0.50% from the then existing 0.25%. The BOJ is currently in a rates raising cycle starting 14-Jul-06. Rates had been raised by 25 Bps for the first time since 2002 officially ending the BOJ’s “Zero Interest Rate Policy”.
The recent Core CPI (Y/Y) had come in at – 0.1% for April, up from –0.3% in March. The Core Tokyo CPI for May (Y/Y) had come in at 0.0%, unchanged from April. However, the recent growth numbers out of Japan have been encouraging. The Japanese GDP for Jan-Mar 2007 had come in at 0.8%, which translates into an annualized rate of 3.3%, implying that Japanese recovery is well underway.
It is very interesting to watch the behavior of the Japanese Libor rates. The near term 3-month rate has not moved up and is below the March-07 High while the 12-Month Libor rate has moved up sharply, past the March-07 High. This clearly indicates that the markets are expecting unchanged rates from the BOJ for the next few months and then a rate hike later on in the year. The chart of the 3-Month Libor and the 12-Month Libor for 2007 is given below for a better view (see Chart 1).
Japanese Government Bond Yields are rising, in line with the rise in Bond yields globally. The Yield chart (see Chart 2). for the 10-Year JGB in 2007 is given below. The yield has risen from a low of 1.47% in March-07 to 1.98% currently. Note that the BOJ had already hiked in Feb-07. This suggests that the markets are again expecting a hike sometime in 2007.
Most traders might be thinking that since BOJ is expected to hike later on in the year then why is Yen at or near record lows against the EUR and USD. Doesn’t it seem logical that a currency should go up when its Yield goes up? The answer is that Currencies move on Yield Differentials and NOT on Yield themselves. If the market is discounting one rate hike by BOJ while it thinks that US FED or the ECB would hike more than once, then the currency, which is expected to have greater increase in rates, goes up.
With the BOJ very unlikely to raise Interest rate this time around, most of the attention would be on BOJ Governor Fukui’s speech after the meet to search for possible cues as to the official stand on Interest rates.
Technically, USD-JPY is currently in a large uptrend trading at its highest level since June 2002. The next important Resistance comes in at 124.50. On the downside the important short term Support is at 122.30, the level from which the pair broke out a couple of days ago. A “surprise” hint of a rate hike by Fukui could produce a small dip in the pair, towards 122.30 or maybe 121.30.
Technically, EUR-JPY is also in a large uptrend and is currently headed towards 164.60, its record high, which is expected to be tested over the next few days. A move above that (highly possible) would take the pair towards 166.00. On the downside, the short term Support is at 163.10 and then at 162.50. The big long term Support is at 161.10, and buyers are likely to be seen on dips while the larger Support holds.
Trade Wise, Trade Well!
The last interest rate change was on 21-Feb-07 when rates by had been raised 25 Bps to 0.50% from the then existing 0.25%. The BOJ is currently in a rates raising cycle starting 14-Jul-06. Rates had been raised by 25 Bps for the first time since 2002 officially ending the BOJ’s “Zero Interest Rate Policy”.
The recent Core CPI (Y/Y) had come in at – 0.1% for April, up from –0.3% in March. The Core Tokyo CPI for May (Y/Y) had come in at 0.0%, unchanged from April. However, the recent growth numbers out of Japan have been encouraging. The Japanese GDP for Jan-Mar 2007 had come in at 0.8%, which translates into an annualized rate of 3.3%, implying that Japanese recovery is well underway.
It is very interesting to watch the behavior of the Japanese Libor rates. The near term 3-month rate has not moved up and is below the March-07 High while the 12-Month Libor rate has moved up sharply, past the March-07 High. This clearly indicates that the markets are expecting unchanged rates from the BOJ for the next few months and then a rate hike later on in the year. The chart of the 3-Month Libor and the 12-Month Libor for 2007 is given below for a better view (see Chart 1).
Japanese Government Bond Yields are rising, in line with the rise in Bond yields globally. The Yield chart (see Chart 2). for the 10-Year JGB in 2007 is given below. The yield has risen from a low of 1.47% in March-07 to 1.98% currently. Note that the BOJ had already hiked in Feb-07. This suggests that the markets are again expecting a hike sometime in 2007.
Most traders might be thinking that since BOJ is expected to hike later on in the year then why is Yen at or near record lows against the EUR and USD. Doesn’t it seem logical that a currency should go up when its Yield goes up? The answer is that Currencies move on Yield Differentials and NOT on Yield themselves. If the market is discounting one rate hike by BOJ while it thinks that US FED or the ECB would hike more than once, then the currency, which is expected to have greater increase in rates, goes up.
With the BOJ very unlikely to raise Interest rate this time around, most of the attention would be on BOJ Governor Fukui’s speech after the meet to search for possible cues as to the official stand on Interest rates.
Technically, USD-JPY is currently in a large uptrend trading at its highest level since June 2002. The next important Resistance comes in at 124.50. On the downside the important short term Support is at 122.30, the level from which the pair broke out a couple of days ago. A “surprise” hint of a rate hike by Fukui could produce a small dip in the pair, towards 122.30 or maybe 121.30.
Technically, EUR-JPY is also in a large uptrend and is currently headed towards 164.60, its record high, which is expected to be tested over the next few days. A move above that (highly possible) would take the pair towards 166.00. On the downside, the short term Support is at 163.10 and then at 162.50. The big long term Support is at 161.10, and buyers are likely to be seen on dips while the larger Support holds.
Trade Wise, Trade Well!
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