Tuesday, August 21, 2007


As I prep for the coming week, one of the big questions I am wrestling with is whether the JPY is going to get stronger in the near term or not. The run this currency has been on the last two weeks has been extraordinary but was paused when the whole market reversed on the Fed discount rate cut. Whether this run will continue in the near term could be resolved this week.

The first thing I am watching for is whether we continue to see equities suffer. If that is the case, we will likely continue to see the JPY strengthen as riskier investments (stocks, carry-trades, etc) are converted to safer strategies. Without a larger tier of economic announcements to fill out the week, trader sentiment should be easy to isolate and true biases towards the market may appear.

The second thing I am watching will be the Japanese monetary policy announcement on Thursday. While it is quite certain that they will not make a change this month, the Bank of Japan is anxious to raise rates and begin to become more normalized. Without the ability to manage monetary policy with interest rates, the BoJ is operating with one hand behind its back. On the other side, there is a lot of pressure from the gov't and international bankers to leave rates low so as to not spoil the slowly recovering economy. These are the two horns of a true dilemma. Since I don't anticipate an interest rate increase, I am watching for rhetoric. What will the BoJ governor say? What will the responses from the Japanese gov't and international investing community be? If traders start to see a rate hike in the short term then we may see more JPY strength, which would be very bad for retail and institutional carry traders.