Hello!!!
I’d like to share the news, and discuss how this will affect Carry Traders.
Most Central Banks try their hardest not to surprise the market, and give hints to investors regarding changes in Monetary Policy before implementation.
However, the Bank of Japan (BoJ) gave the market a surprise with larger than expected asset purchases. Japan plans to purchase 7 Trillion JPY per month in bonds, rather than an expected 5 Trillion.
The current monetary base of Japan is calculated at 135 Trillion Yuan. In effect, within two years if Japan continues purchasing a monthly 7 Trillion JPY in assets, they will effectively double the monetary base. The BOJ plans to continue purchasing assets until it obtains an inflation of 2%.
Here is a look at USDJPY on the MetaTrader4 Forex Trader Platform: JPY Dropped 250 pips in 2 hours.
This illustrates the importance of Monetary Policy and Interest Rates on the market. Many traders get caught up in Technical Analysis, oscillators, etc. but in order to truly understand how the market moves, Interest Rates are key.
John J. Hardy, Head of FX Strategy, Saxo Bank writes:
The endless irony is that as the BoJ promises inflation, Japanese bonds are moving to record low yields in anticipation of the blitz of BoJ purchases - the 10-year JGB’s have dropped to 44 basis points overnight after trading close to 60 bps to start this week and over 100 bps a year ago. If inflation does return, then a JGB is the last thing an investor wants to own – but for now, it’s all about “the flow”. Negative interest rates are clearly coming to Japan as the great confiscation of Japanese savings now begins. How will Japanese savers respond? Buying risk assets abroad, buying domestic equities, buying hard assets like precious metals and real estate? Finally, how will the rest of the world respond on the currency wars meme? Many questions, few answers – for now, let’s see where the kneejerk reaction takes us. - John J. Hardy
Are Japanese Bonds forever plagued with negative interest rates? This is, of course, largely due to Carry Traders, as JPY has always been on the funding side of the trade.