Article / 11 January 2018 at 2:36 GMT

Trigger-happy traders drive up yen, mistake tweaking for policy shift

Managing Director / Technical Research Limited
New Zealand
  • The yen has rallied across the board on BOJ tapering rumours
  • But policy tweaks, if any, would be held back for January 23 meeting
  • Eurodollar futures suggest markets falling into line with FOMC rate projections

By Max McKegg

The Bank of Japan is in regular contact with dealers in the government bond market advising them of bond buying plans as part of its yield-curve-control policy, targeted at holding the return on the 10-year maturity at “about zero percent”. On Wednesday the bank informed the market that, in a purely tactical move, it would slightly reduce the amount of long-dated bonds to be purchased on the day.

This seems to have caused great excitement among FX traders who pushed JPY higher across the board on the basis that this signalled a tapering of the BOJ’s quantitative easing program. The move is also being cited as a reason the US 10-year Treasury bond yield rose over 2.5%, thus kicking off a “bear market” according to some excitable analysts.

 Japan's unemployment has hit a multi-decade low and the output gap is closed, so conditions are in place for an uptick in inflation, but there is no sign of it yet. Photo: Shutterstock

Cooler heads will notice the BOJ meeting set down for January 22-23 at which updated economic and price forecasts will be presented. If there is to be any change to monetary policy, that is the time it will be flagged. Any “signals” beforehand are an illusion.

The FX move means that the strong correlation between USDJPY and the US 10-year bond yield, already weakening over recent weeks, appears to have broken altogether, as shown in this weekly chart (click to enlarge).

USDJPY chart
 Source: Metastock. Create your own charts with SaxoTrader; click here to learn more.

However, traders have jumped the gun. The BOJ did give any signal when fine tuning its bond buying operations. The policy making board meets on January 22-23, and afterwards will issue its monthly Statement on Monetary Policy, the wording of which hardly changed at all last year. Governor Haruhiko Kuroda recently summarised his position as  “there is still a long way to go to achieve the price stability target of 2%. Given this situation, the Bank will persistently pursue powerful monetary easing......”

That doesn’t sound like a man who would be taking his foot off the accelerator any time soon.

Nevertheless, the governor is only one of nine board members and the upcoming meeting coincides with release of the quarterly Outlook for Economic Activity and Prices, where each participant submits forecasts. If there has been any change in sentiment among the board as a whole it will show up in the “dot plot” of GDP growth and inflation projections.

With the unemployment rate at a multi-decade low of 2.7% and the output gap closed, conditions are in place for an uptick in inflation but there is no sign of it yet. As the following chart shows, the annual headline rate may have crawled up to 0.9% but is mostly due to energy price effects. The core rate (all items except fresh food and energy), which can be viewed as “home grown” inflation, continues to languish not much above zero.

Japan CPI chart

Source: Pictet Wealth Management

In its October 2017 forecasts the BoJ projected headline inflation of 1.4% over fiscal 2018 and 1.8% the year after. Oil prices have risen since then and economic growth is rising steadily, but it’s unlikely the January 23 update will raise these projections by more than 0.1%. Besides, the official line is that “powerful monetary easing” will continue until the observed rate of inflation - not the forecast - exceeds 2%, the so-called “inflation over-shooting” commitment.

A minor upward adjustment to the inflation forecasts, based mainly on energy price effects, is unlikely to convince the BoJ to change the current yield-curve-control co-ordinates of negative 0.10% for the policy rate and “around zero percent” for the 10-year JGB.

As the following chart shows (click to enlarge) the bank has stepped in on previous occasions when the yield had threatened to rise over 0.10%. When you own over 40% of the market –as the BoJ does – you get to call the shots (and they don’t lend out their holdings to hedge funds to short against them)

Japan government bonds chart
Source: Metastock

While the rally in JPY this week was premature it would be justified perhaps if the January 23 statement resolves the apparent conflict between the BoJ’s commitment to expand the monetary base (mainly via bond purchases) at an annual pace of ¥80 trillion while at the same time holding the 10-year JGB yield around zero percent. In other words, trying to control both volume and price at the same time.

The market is guessing the bank will place more emphasis on the price (yield) component.

Meanwhile, on the other side of the USDJPY cross, the probability of the FOMC pressing ahead with another rate rise in March is 68%, based on pricing of fed funds futures. Also, slowly but surely the market is coming around to the idea there will be three moves in 2018, with a 15% chance of four.

Chartists will have noted sentiment changing accordingly in the Eurodollar futures market. This chart shows a complex head and shoulders pattern in the December 2021 contract (click to enlarge). Friday’s CPI report out of the US could give this move some momentum.

EURDLR chart

Source: Metastock

Traders bidding up JPY on the back of fine tuning by the Bank of Japan this week have jumped the gun. Any tweaking of monetary policy – via adjustment to the yield curve control parameters – would be announced on January 23 after the board considers updated economic projections.

That’s possible, but not probable. Any “signals” being picked up ahead of then are based on wishful thinking.

For more on forex, click here.

– Edited by Robert Ryan

Max McKegg is managing director of Technical Research Limited. Follow Max here or post your comment below to engage with Saxo Bank's social trading platform.

Michael O'Neill Michael O'Neill
Great art, Max.
Max McKegg Max McKegg
Nice one Mike !
brandon lee brandon lee
Patto Patto
Perhaps this yen move has less to do with the Bank of Japan and more about looming "risk off" conditions. After all, that's the traditional situation when JPY rises on all crosses.
ContraTrades ContraTrades
I haven't seen a risk off mode since late 2016, but maybe I watch another market.


The Saxo Bank Group entities each provide execution-only service and access to permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail