Japanese Yen Weakens Despite BOJ Hike; Cable Cut Down by Dovish MPC

• JPY BOJ Goes to 50bp but remains cautious
• EUR French CPI cold
• GBP MPC minutes dovish
• USD CPI on tap

BOJ raised rates to 50bp in late Asia trade tonight, but Governor Fukui’s cautious tone in the post announcement press conference cast doubt on any additional rate hikes in the near future and as a result the market ignored the news and pushed the yen to new lows for the week with USDJPY nearing the 121.00 level. Mr. Fukui stated that the BOJ will raise rates slowly only after a careful analysis of economic data. Furthermore he sidestepped the issue of carry trades, noting that, “we are not directly taking them into account when we make important monetary policy decisions." The BOJ’s slow-as-they-go message essentially invited currency traders to plow right back into the carry trade on the assumption that tonight’s hike was a one off event much like the first rate hike in July of 2006. Since time, the bank waited 7 months before hiking rates another 25bp tonight and while such a long gap between rate hikes is unlikely, any pause for 3 month or more will still provide carry traders with ample opportunity to collect the interest rate differential between the yen and much higher yielding currencies such as the dollar, the pound and the Aussie.
Although carry trade flows continued fast and furious throughout the European session the one currency that failed to get much traction against the yen was the pound. Tonight’s release of the MPC minutes offered a more detailed look into central banks thinking on rates and the net takeaway from the discussion was that the BOE is likely to remain stationary on rates for at least several months forward. Although some analyst still expect another tightening move in May, we see little chance of further rate hikes unless UK wage growth suddenly accelerates. Given the fact that this months wage growth figures actually printed below expectations the likelihood is that the BOE monetary policy in the next few months will continue to be neutral rather than hawkish. As the MPC members themselves noted, “a closely spaced series of interest rate increases might lead to excessive tightening.”