FxWirePro: Is BoJ in Catch 22 Situation? Wise to Uphold Short Hedges

The Bank of Japan is in a similar situation to the ECB, as it too has to ask itself what options it would still have in reaction to a significant weakening of growth. In particular, as regards scope for further rate cuts comments from within the BoJ differed recently. 

The general lower limit is currently seen as being the so-called "reversal rate", i.e. the interest rate level that according to this theory is so low that the banking sector’s ability to function is affected and therefore has restrictive effects. According to the deputy governor of the BoJ Masazumi Wakatabe, this level has not yet been reached though. With this comment, he signaled that the BoJ was not only able to but also prepared to act. 

However, the minutes of the last monetary policy meeting have now made it clear that at least one colleague does not seem to share Masazumi’s view. He sees interest rates as having almost reached the limit and is therefore concerned regarding further rate cuts. This apparent disagreement within the BoJ is likely to sufficiently fuel concerns on the market to dampen rate cut expectations and to strengthen JPY – particularly in times of rising risk aversion.

Furthermore, we highlight the bearish driving forces of USDJPY: the global investors’ risk aversion heightens significantly, the markets further price in a possibility of Fed’s rate cut, the US starts vehemently criticizing Japan’s trade surplus against the US and Japan's economy further decelerates and speculations for the BoJ’s additional easing grows.

Shorting USDJPY futures contracts of mid-month tenors have been advocated, on hedging grounds ahead of G20 summit that is scheduled for this weekend, we now like to uphold the same positions as the underlying spot FX likely to target southwards below 106 levels in the medium run. Writers in a futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Commerzbank

Currency Strength Index: FxWirePro's hourly JPY spot index is inching towards -52 levels (which is bearish), and hourly USD spot index has bearish index is creeping at -63 (bearish) while articulating (at 08:50 GMT). 

For more details on the index, please refer below weblink: http://www.fxwirepro.com/currencyindex