The Bank of Japan would face a huge loss on its large holdings of government bonds if it loses control of the yield curve. Indeed, more and more hedge funds are shorting the government as inflation hits the country. A policy shift could lead to a loss of 29 trillion yen ($219 billion) on the BOJ’s bond holdings, according to Bloomberg based on central bank data show. That’s under a hypothetical scenario where the entire yield curve shifts upward by 100 basis points.
Traders Bet Dovish Bank of Japan to Capitulate After Swiss Shock
Currency options traders are betting the Bank of Japan will join global peers like the Swiss National Bank in roiling markets with a monetary-policy surprise this week.
Demand to hedge one-day price swings in the yen ahead of the BOJ’s meeting Friday is the highest since March 2020 and traders are also betting that the yen might get stronger in a couple of days. An unexpected move by the SNB to raise interest rates for the first time in 15 years on Thursday put the CHF on track for its biggest rally since January 2015, when a cap on the currency was removed.
What’s in the pipe?
- Bank of Japan policy decision, Friday.
- Eurozone CPI, Friday.
- US Conference Board leading index, industrial production, Friday
USD/JPY @ 134.85 - Bullish trend
EUR/USD @ 1.0525 - Bearish trend
GBP/USD @ 1.2296 - Bearish trend
AUD/USD @ 0.7000 - Bearish trend
USD/CNH @ 6.6996 - Bullish trend