Yen Above 108.00 and BoJ Keeps Rates on Hold Will G8- Do Anything on FX?

[B]Talking Points

• Japanese Yen: BOJ keeps rates on hold
• Euro: Drops through 1.5400 as Fed rate hike speculation grows
• Pound: Drifts lower on empty calendar
• US Dollar: CPI key event risk for the day[/B]

In a typically predicable fashion BOJ kept its overnight lending rate on hold for yet another month as Governor Masaaki Shirakawa noted that that Japanese economic and price conditions were different from those in the United States and Europe. In a post announcement press conference Governor Shirakawa stressed that each nation should decide monetary policy based on its own conditions essentially signaling to the market that the BOJ has no intention of increasing rates anytime soon.

Despite highest inflation rate in decades, the Japanese monetary officials are far more concerned about stagnating economic demand. The latest Japanese government report is going to lower the economic outlook in June, for the first time since March 1st as sliding corporate profits and depressed consumer sentiment continue to weigh on growth.

By maintaining this cautious approach to monetary policy Governor Shirakawa is certainly following in the footsteps of his predecessors but he now stands in stark contrast to President Trichet and Chairman Bernanke who have been much more outspoken on the danger of escalating price pressures to their respective economies. As a result of today’s decision USDJPY once again rose above 108.00 with currency markets clearly understanding that the yen will remain the predominant vehicle for carry trades for the foreseeable future, risk appetite permitting.

Meanwhile the EURUSD broke the 1.5400 barrier to the downside as positive dollar sentiment continued to dominate trade. For the most part currencies spent Asia n and European session marking time as traders focused on US CPI data due at 12:30 GMT which will be the key event risk for the day. With yesterday’s better than expected Retail Sales on the books, the greenback now has the wind at its back as the fundamental backdrop appears to be supportive of a more hawkish Fed stance. If today’s CPI data prints hotter than projected the expectations of a Fed rate hike are sure to ratchet higher providing further boost to the buck especially against the yen as traders start to price in the possibility of a new round of interest rate expansion.

Finally, this week-end brings the G8 meeting which remains somewhat of a mystery to the market. It is still unclear if FX and most specifically the chronic weakness of the dollar will be a point of discussion on the agenda. With the dollar starting to already strengthen the G-8 policy makers may decide to press the move further by reaffirming their desire for a rebalancing of rates. In that case the EURUSD may drop the way to 1.5000 in the wake of post G-8 volatility. However, if the subject of FX is ignored the meeting may turn out to be a non-event for the currency market on the Asian open Sunday night.

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