Yen Above 120 as Market Ignores BOJ

· EUR French GDP up but misses slightly
· GBP Lending back up but high rates weigh
· CHF Still no price pressures at wholesale levels
· CAD CPI on tap

With capital markets in Far East back to work after the Lunar New Year holidays, traders wasted little time selling USDJPY from the start ofAsia trade, despite the increasing odds of a BOJ rate hike tomorrow night. Buoyed by demand from Japanese retail accounts the yen dropped against both the dollar and the euro trading above 120 on USDJPY and 158 on EURJPY. The prospect of a 25bp rate hike by the BOJ does not appear to concern the majority of market participants as most speculators believe that Japanese central bank will move right back to the sidelines for a considerable amount of time even it does tighten monetary policy one more time.

In fact, tonight’s weakness in the yen suggested that many players were betting on BOJ remaining stationary at 25bp. Seeing this price action, Japanese monetary authorities clearly have to recognize the fact that they have lost total respect and control of the currency market. That reality in turn may prompt them to assume a more hawkish posture than the markets expect. Therefore, yen shorts could be vulnerable if BoJ decides to both raise rates and signals that it may begin the process of normalization in earnest. As we noted yesterday, “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 “
If on the other hand, BOJ remains cautious and passive, the carry traders will assume full control of the market fearing no further action from the bank until the completion of Japanese elections in June and the pair will likely rally to 122.00 to test its recent highs.