Hodge BOJ

Hang onto your hats, ladies and gentlemen: tonight is the night that the BOJ may or may not switch short term interest rates from virtually zero to...er...virtually zero, give or take.

Markets are currently pricing in roughly a 60% chance of a rate hike tomorrow, so on the face of it there may be some upside for JGB yields and the yen should they deliver. By the same token, 3 month TIBOR is 0.55%, so markets have by and large already completely discounted some movement in the near future.

As such, any initial impulse for the yen and JGBs may swiftly fade; a rate hike tomorrow will be as good as it gets for JGB and USD/JPY bears, and they may feel compelled to take profits.
One trade that Macro Man has been tracking for a while but not pulled the trigger on is playing for further tightening in H2. The spread between June and Dec 07 euroyen futures has ranged between 15 and 40 bps over the past year or so. It is currently at 21 bps. Macro Man suspects that after the upper house elections in July, political opposition to higher rates will ebb, thereby raising the risk that 2007 tightening is actually backloaded.

Macro Man will therefore try and buy the spread (10,000 futures) at 19.5 bps, looking for a move to 30. If done, he will stop out at 14.5.

Separately, USD/SEK is at an interesting level. Macro Man will look to sell $20 million at 7.07 for the alpha portfolio, with a stop loss at 7.1150.

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