- I find it very interesting that the BOJ is releasing ALL of its key economic data (minus GDP) before making the easing decision, especially as we have already had CPI data this month so we will have an 2 CPI releases in one month which ive never seen happen before ( CPI from JPY is usually due next week).
- This to me indicates strongly that 1) All of the data released e.g. CPI , employment, retail sales, industrial production has some weighting on the BOJ decision and 2) that CPI especially has perhaps the strongest weighting on the BOJ decision as they are releasing 2 CPI prints in one month which means they brought forward the measurement by a week - this means they value the CPI print strongly.
- Therefore, knowing this, in an ideal world either 1) ALL of the data will contract, which puts more pressure on a big BOJ easing package or 2) ALL of the data improves which eases the the pressure on the BOJ package - thus from here we are then able to take risk with an "educated" guess of what the policy will tend to be i.e. big or smaller.
Long USDJPY if CPI less than -0.4% and generally weak/ miss other data:
1. The rationale is that a lower than expected and last print shows the JPY economy is decelerating even more aggressively than in previous months and therefore the BOJ will me MORE inclinded to ease heavier, as the data suggests there is a bigger problem.
- Obviously the data/ CPI print imo acts as a function of BOJ easing, if we get massive misses across the slew of data then we should expect a bigger easing package than if there is only a slight miss - therefore we should treat our trades the same way.
2. Long USDJPY by xlots depending on the serverity of the data miss e.g. if CPI was -1.0% and unemployment ticked up to 3.4% i would do 3lots long usdjpy . If it was -0.5% and 3.3% i would do 1lot for example.
Short GBPJPY if CPI is greater than -0.4% and other data generally hits/ is positive
1. The rationale is the opposite of the above - we assume if data improves that the BOJ will be less inclined to do a big easing package so we expect yen to remain strong so we go long yen and short GBP.
- Once again the lot size is a function of the serverity of the data e.g. if CPI turned positive to 0.1% and unemployment dropped to 3% we would short 3lots. vs only 1lot if CPI ticked up only 10bps from last and unemployment ticked down only 10bps.
Risks to the view:
1. The First risk is that data in general is considered to have "underlying trends" so the fact one print is outstandingly bad/ good might NOT impact policy e.g. thin about US NFP that was less than 100k and shocked markets - but it was a one off so didnt make the FOMC cut rates back.
3. Data underlying trends thus can reduce the weighting this data is given e.g. even if CPI improved to 0.1% from -0.4%, the BOJ could argue this is a one off print as the underlying trend for the past 6m+ has been negative thus they will go ahead with a big easing package.
- HOWEVER, the above point "3" in mind i believe data to the downside will be given a greater weighting than data to the upside, so we should have a short yen bias as weak data has been the underlying trend for most data points (especially CPI ).
-Further, i also think tail-end/ RHS/ LHS results will be given a proportionately larger weighting in their decision so this should also be reflected in our trading e.g. if CPI was -2% from -0.4% i would be a much much more aggressive buyer of UJ than if a -0.5% print from -0.4% is seen. The same can be said to the topside, if i saw +1.5% from -0.4% last i would be a much greater seller of GBPJPY than if i saw -0.3% CPI from -0.4%.
The second risk is that it is somewhat naive to think that the BOJ's easing package will be solely based on this months data print - however to me the fact that theyve unusually organised all of the big data points to be released before their decision shows to me this data is being given a disproportionate weighting in their decision, thus we should also give it a bigger weighting in our trading - they could have used the prints from earlier in the month for example.
On the margin data was literally flat, no bias to long or short BOJ - markets are currently mildy betting against the BOJ though, 3m euroyen and 3m jpy libor ended pricing 6-10bps of cuts and currently we see yen up vs usd, gbp, eur by about 0.5%, and yen vs gold is up about 0.5% also, with nikkei down 0.8% - all of which indicate the market is short BOJ/ betting on a BOJ under-delivery.
Best way to play an under delivery is to sell GBPJPY as discussed - if i see 10bps cut to the Depo that will say it all and i will be short.
If we see any squeeze higher, best to buy $yen but take profits after 100-200pips then fade the downside with short gbpjpy or $yen.
market vol is high and likely to be very fast so in case of mild BOJ delivery perhaps is best to leave the long $yen and instead concentrate on fading the topside of $yen or gbpjpy with a short at 107/ 140 next level would be 109/ 142 then 111/ 144.
Delivery is expected anywhere between 3am GMT and 6am GMT - 1hr 55mins from now.