BOJ 31.07.2018 last preview

Well I don’t have much to add to my last week’s preview to be honest. The BOJ watchers seem pretty much aligned with my expectations of what is reasonably to be expected, IF ANY CHANGE AT ALL.

My base case scenario is there will be some adjustments made, pressure to consider the to tight conditions for local banks and lenders have grown lately and inflation is not going to reach 2% soon in any case.Any change though will be brought forward as smoothly as possible:

As we read before ETF purchases could see a percentage wise reshuffle between Nikkei and Topics.
We could see some sort of scaling down of the JGB and ETF buying targets to reflect a more actual buying rhythm, which is way below the actual 8tln and 6trln JPY respectively.
On the YCC side, instead of keeping rates pinned at zero, we could get a range put in place to leave wiggle room. I put forward a 0 to 0.1% or even 0.25% range, but recent specialists are seeing something rather like -0.1% to +0.1%.

What makes me doubt there will be much more is that
-One: It’s BOJ and they are still firmly on their inflation and growth mission, they will want to prevent derailing the still very fragile recovery.
-Two: This year’s new board members are hard liners, even at the crib of Abenomics
-Three: Abe is very likely to get re-elected as LDP leader in September, purely due to a lack of contenders, the main one, Kishida, having given up already and now supporting Abe instead.
-Four: Like most CB’s they have the trade war uncertainties to hide behind. Next month should see US-Japan talks, I wouldn’t think big changes are to happen before unless pressure has been put on BOJ to show some goodwill to the US???

These factors are making it hard to see any more than what outlines above. More would be revolutionary.

So how to trade it? Well JPY should move depending on “no change”, ” a smooth change” and “a revolutionary change”
-Case 1: JPY falls out of grace. The USDJPY 111.45/60 resistance zone should break and the 112.10/20 pivot area come under pressure. More than that I reckon JPY crosses would shoot, such as EURJPY, CADJPY, NZDJPY and AUDJPY looking at today’s relative USD weakness and month end models calling for USD sales.
-Case 2: The above changes are made. The market should take it as mildly positive at first for JPY, but should soon realise interest rate gaps will remain. In such case I would expect an initial dip in USDJPY to around the July lows 110.30/40 and JPY crosses such as GBPJPY and EURJPY give up today’s gains before stabilising and entering into a range. I don’t think this minor change would warrant a decisive break of 110 USDJPY but know that the top of the daily could is arnd 109.95 going into BOJ. Japanese players will be scrutinising that level.
-Case 3:BOJ raises rates and scales back on QQE: Armageddon. USDJPY visits May’s lows at 108.10 fast and is on its way back to 104.50-105. Crosses will of course follow suit with EURJPY and GBPJPY amongst the most vulnerable imo to break lower.

I’m going in tiny short GBPJPY from last week for as long as it holds sub 146.50, which was a pretty good break on the way down. I have very little faith in GBP, even though BOE should raise 25bps later this week.
Don’t be surprised to see some erratic moves as the market adjusts positions going into the decision which can be expected from around 1.45-2AM GMT. BOJ never has a fixed time to announce their decisions. Kuroda is expected to explain all of it in detail to us, in case we wouldn’t have understood. If changes there are, it could be a legendary press conference by the man who has the power to put everybody asleep within 5 minutes.

Stay safe and happy hunting folks


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