Japanese Yen Weakens Slightly Ahead of BoJ; British Pound Pummeled

• GBP Rightmove still recording double digits gains
• JPY Nationwide Department store sales show first non-negative month in 4
• EUR calendar barren
• USD calendar barren
• CAD International Security Transactions on tap

With capital markets in Far East closed for the Lunar New Year and with US markets closed for Presidents day, currency trading started the week off in an extremely quiet fashion. The only major theme in the market revolved around the upcoming BOJ rate decision due 5;00GMT Wednesday morning. Although odds of a hike actually increased over the weekend rising to 60%, the yen lost ground against both the euro and the dollar as some FX traders remained skeptical of the move. Many yen bears are willing to sell the currency despite the risk of a rate hike, convinced that even if it hike rates, the BoJ will not pursue a policy of sustained tightening, but rather will once again move to the sidelines for a considerable amount of time much like it did after the first rate hike in July 2006. Under such circumstances, yen’s 0.5% rate will still provide ample margin for profit especially when paired against greenback’s 5.25% yield.
While we too believe the BoJ is unlikely to provide hawkish guidance in the post decision conference, we nevertheless feel that the impact of the rate hike will not be as benign on the carry trade as many yen shorts surmise. The tightening of liquidity, should the BoJ hike rates will be felt globally, especially by the myriad of speculators who have borrowed yen to finance trades in other markets such as commodities. Therefore, the BoJ move limited as it may be, could still provide the trigger for further carry trade liquidation later in the week.

Meanwhile the pound, collapsed at the open of London trade as the details of the MPC report to the UK Treasury spread across the City dealing desks. Although the MPC report touched on many familiar themes, stressing the upward risks to inflation, traders focused on one particular section that noted some GBP depreciation would “probably be necessary” given UK chronically high current account deficit. Over the past several years, traders have blissfully ignored the structural problems surrounding the UK currency, but tonight’s explicit mention of these problems by the MPC triggered a slew of sell orders which were further exacerbated by relatively thin holiday trading. Furthermore, with UK economic data showing a sudden slowdown in growth and consumption the latest evidence of which was the rather tepid gain in the Rightmove report which increased in February at the softest rate since the survey’s inception 5 years ago, tonight’s downward move in cable was not really surprising as traders reassess the likelihood additional rate hikes by the BOE anytime in the near future.