Halister News

(Bloomberg) -- USD/JPY option traders may be caught off-guard if BOJ follows Bank of Korea’s footsteps last week and surprises market with a decision to ease policy at its meeting on June 16, Bloomberg strategist David Finnerty writes.

• BOJ will maintain policy when it meets this wk, according to 31 of 40 economists surveyed by Bloomberg; 9 of them expect more stimulus
• USD/JPY 1-mo. implied volatility is currently 14.22 vol, indicating that market assigns a 72% probability that FX pair will trade between 101.47-110.49 over the next month based on current spot of 106.14
  • A trading range of about 4.50 big figures either way, suggests markets aren’t expecting a BOJ surprise given how much spot moved on past occasions when the central bank sprung a surprise
• BOJ has a history of easing when markets least expect it, resulting in volatile spot moves:
  • Oct. 31, 2014: BOJ increased QQE by JPY10t when 32 of 35 economists predicted no change
    • USD/JPY rallied from 109.18 low on the policy decision day to 118.77 in the following month, a move of 959 pips
  • Jan. 29, 2016: BOJ introduced negative rates when 37 out of 41 economists predicted no change to monetary policy in any form
    • USD/JPY fell from a high of 121.69 immediately after the meeting to 112.69 at the end of Feb. a move of 900 points
• Some economists are predicting BOJ to increase QQE in coming months to help the economy reach its 2% CPI target
  • April CPI was -0.3% y/y with core inflation at 0.7% y/y
• NOTE: June 9 - BOK unexpectedly cuts rate to record low of 1.25% to support debt restructuring; only one of 18 economists surveyed by Bloomberg had expected this
• NOTE: David Finnerty is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.