Dollar Could Tank vs. Yen By End of Year

Wouldn't you know it... comments from a BoJ voting member reiterated the possibility of more rate increases by the end of the year, as the FT points out. Seems reasonable. We'll see a push towards .50% by the end of the quarter, and perhaps a push towards 1.00% by year's end. I don't think that's out of the realm of possibilities. In fact, I see it as being prudent. The BoJ wouldn't want to get themselves into a situation of rapid inflation growth after so many years of deflation. That would almost be embarrassing.

But I also see that as being in the realm of possibilities. See, the United States' policy of turning the printing presses on at full speed to get the economy back up and running (and avoiding a deflationary situation like Japan's), has been exported to other nations. In some regards, the Japanese would welcome inflation with housing growth. But, that's also the very reason they got themselves into their 16 year mess. There's a need to prove that their policies were right while making sure the situation doesn't blow up in their face with runaway home prices. That's not a ball you want to get rolling too hard.

This could make for interesting trading going into the end of the year. If the BoJ gets a little more aggressive, and talk starts of “interest rate differentials narrowing”, the dollar will tank against the yen. This won't be a cautious move. This will be a move the likes of 1995 when the yen pushed 11 big figures in two days.

Get ready.... it could be fun.

Comments

[WC Whiner:]

I've been betting on much the same for a few weeks, after the $/yen moved up so hard, via deep out-of-the-money futures options. Net-net I'm even for the moment, but I fully expect to eat premiums for a while until the dollar cracks or the data swing in a way that convinces me to exit the play.

2006 Aug 02 07:24 PM

[Enzio von ...:]

I am not so confident that one should view BoJ policy with Western eyes. My years in Asia teach me that especially in Japan, policy-making is "tribal": no "one" individual stands out, as say a Prof. Bernanke or a Claude Trichet...

My take is different: that next year, Japan has to raise its VAT considerably, as they on 7th July decided to cut their primary deficit to zero by 2011. We all know how badly the economy and market fared in 1989, when they introduced VAT, and in April, 1997, when they increased it. So one member of the tribe, the MOF, will oppose rate hikes on top of tax hikes.

Another member, the future PM, Abe, also will oppose: he won't want to start his stewardship by allowing Japan to dunk into recession yet again.

My favorite fx play: long Euro, long Pound, short yen.

2006 Aug 05 06:29 AM