Trading the BoJ Rate Decision

[B]Trading the News: Bank of Japan Rate Decision[/B]
[B][U]What is Expected[/U][/B]
Time of release: [B]09/19/2007 n/a GMT, n/a EST[/B]
Primary Pair Impact : [B]USDJPY[/B]
Expected: [B]0.50%[/B]
Previous: 0.50%

[B]How To Trade This Event Risk[/B]
Though the Bank of Japan has not altered the target on its benchmark lending rate since February, the market angst surrounding the meeting has only grown over the past month. Before August rolled around and the availability of short-term lending dried up, the markets were fully pricing in another step in the BoJ’s gradual policy regime since the summer elections had passed and economic data was still supporting modest growth and inflation. Conversely, at the last gathering ending on August 23rd, the monetary policy body announced its decision to leave rates unchanged at 0.50 percent. This was fully expected as the outlook on growth quickly deteriorated along with a global credit crunch that was clearly spreading beyond the US subprime market to nearly every corner of the globe’s financial markets. Recently, hopes for seeing a hike this year have diminished even further. The return of negative CPI numbers and a downward revision in the annualized second quarter GDP report (that reported the first contraction in the Japanese economy since 2004) have essentially put the central bank on hold indefinitely. This time around, traders will be waiting anxiously for the monthly report and Fukui’s press conference to gauge whether his tame hawkishness has been squelched, or - if like the SNB - he still sees room to ‘normalize’ rates.
A yen-bullish outcome from this rate announcement would have to have both fundamentals and technicals in its favor. From a fundamental stand point, there should be clear confirmation that the BoJ still sees upside growth and inflation trends in both the monthly report (06:00 GMT) and press conference (06:30 GMT). The rate decision itself is almost certainly going to be a non-event. On the technical side, the market may still be hot after the Fed decision; so direction and volatility can play into the BoJ decision. The strategy is the same as usual with a two lot entry long with an initial stop at the swing high (or reasonable fixed distance). The first lot’s profit target should equal risk and the second should be discretionary. When the first lot makes profit, the stop on the second should be moved to break even. Entry for this indicator will be difficult to gauge given its imprecise nature, so watching volatility and looking at the report and speech are essential.
Playing the bearish result will also included technicals and fundamentals. Should commentary and statements show no sign of a rate hike in the near future, the yen’s funding currency status could return in full force like it did in February. Once again, considered USDJPY price action after the Fed’s decision and look for possible continuation (a confliction would have more trouble gathering momentum).