Trade Ideas

BOJ and Fed: What the professional traders think… and what’s the Outlier

Analysts, economists and commentators have been having their say for weeks but what are professional traders thinking?

BOJ: Short-term risk is still to the downside according to most surveyed, with an almost unanimous expectation that the BOJ will introduce its adjusted policy framework but will be light on policy changes. Perhaps a token 10bps cut, deeper into negative rate territory, but with very little else in terms of actual policies.

If this is what eventuates, traders expect USD/JPY to be testing 100 later this evening.

Most seem comfortable with a range trading strategy and don’t expect any huge moves either way. Levels towards 98 are seen as good-value buys, especially given the large long JPY positions on many of the cross pairs. Levels above 104 are likely to attract plenty of corporate selling again and should cap rallies if the BOJ does surprise with additional easing measures.

FOMC: If the Fed raises rates then traders expect the GBP and AUD to bear the brunt of USD buying. Equity markets will dip sharply on any rate rise followed by hawkish tones, and this will impact immediately on traditional ‘risk’ currencies.

If the Fed keeps policy unchanged, but signals a post-election rise (which seems to be the favoured consensus), then traders expect very little movement in the major pairs apart from the usual chase after short-term stop-loss orders.

OUTLIER: The big risk in the market is still that USD/JPY has an explosive move back below 100 forcing corporate and option-market hedging to accelerate. This would be caused by inactivity by both central banks. So if both do and say nothing new, expect USD/JPY to be well below 100 by week’s end.

None of the traders I spoke with will have any major risk in play heading into the events. Like every good trader, they will wait and see what the market tells them post event and then act accordingly.

Good luck++