NEWS / Foreign Exchange

BOJ Holds Rates Steady; Pound Propelled by Inflation Data

Talking Points

??? Japanese Yen: BOJ stands pat
??? Swissie: Producer Prices are higher than forecast
??? British Pound: Inflation runs hot suggesting further rate hikes
??? US Dollar: Housing starts/permits on tap

BOJ Holds Rates Steady; Pound Propelled by Inflation Data

As expected the Bank of Japan held rates steady voting unanimously to maintain the repo rate at 50bp. Japanese monetary officials stated that the economy continues to expand moderately but also noted that consumer inflation remains low - words that many market patricians took to mean that the central bank is unlikely to tighten further before Japanese parliamentary elections in July. Although no one expected a hike tonight, most traders were looking for decidedly more hawkish tone from Mr. Fukui and co. Whether they meant to or not, BOJ officials once again flashed a green light to the carry trade speculators who were only too eager to jump right back into the market.

The biggest beneficiary of tonight??™s carry trade flow was the British pound which rose on the news that UK headline inflation printed a tad hotter than expected at 2.8% versus 2.7% forecast. Although the numbers were in-line with BoE own projections, traders nevertheless plowed into the pound on the assumption that tonight??™s data may prompt the central bank to raise rates another 25bp as soon as April. Tomorrow??™s BoE minutes may provide additional clues to MPC??™s thinking but their actions will likely be guided by the release of UK Retail Sales on Thursday. If the data shows strength in consumer sector chances of a rate hike will rise markedly. On the other hand if Retail Sales plunge unexpectedly, all bets are off and today??™s pound longs could well be unwound. Finally, although the carry continues to dominate trade in FX, trading has changed drastically in the past two weeks and the theme of risk aversion, which in the currency market translates into long yen and Swiss franc positions has become just as important as the quest for yield. Therefore, carry trades g may loose some of their luster in the US open if US equity markets come under pressure during the day.