Yen Bulls Take Cover as BNP's 50% Odds of BOJ Move Spur Caution

  • Japan currency's two-month gain versus dollar most since 2012
  • Options show traders paying to protect against euro-yen gains

The yen’s biggest two-month gain since 2012 versus the dollar has made traders cautious of driving further strength before a Bank of Japan decision Friday.

Japan’s currency has climbed 3.8 percent since Nov. 30 as a rout in commodity and equity markets drove investors to haven assets, increasing speculation that further central bank accommodation will be needed to counter any negative economic impact. Options traders paid the biggest premium since April 2013 to protect against a drop in the yen versus the euro over the next week, risk reversals show.

“Our economists have indicated that their base case remains that policy will be left unchanged, but they note that the probability of a move Friday is now close to 50 percent,” Daniel Katzive and Vassili Serebriakov, New York-based currency strategists at BNP Paribas SA, wrote in an e-mailed report. “We remain bearish on the yen heading into this meeting,” and the currency may weaken beyond 120 per dollar if the BOJ acts, they said.

The yen rose 0.2 percent to 118.56 per dollar as of 11:40 a.m. in Tokyo, poised for a 1.4 percent advance this month. It was at 129.65 per euro from 129.99, set for a 0.7 percent gain since Dec. 31.

Risk Reversal

The premium on contracts to buy the euro versus the yen in a week over those to sell it were at 0.07 percentage point Thursday, the most on a closing basis since April 2013, risk-reversal prices show.

The yen’s appreciation against all 16 major peers over the past six months has been accompanied by waning inflation expectations and sliding oil prices, adding pressure on the BOJ to do more to spark price gains and growth in Japan. Some central bank officials view it as a close call as to whether the policy board will add to stimulus, according to people familiar with the discussions.

Thirty-six of 42 economists surveyedby Bloomberg forecast that the BOJ will keep policy unchanged Friday. Japan’s consumer prices stayed barely above zero, industrial production fell and household spending dropped, according to reports Friday released before the decision.

Japan’s currency sank and then surged after the BOJ’s Dec. 18 decision after traders were confused by changes policy makers made to their asset-purchase program, which Neil Jones, London-based head of hedge-fund sales at Mizuho Bank Ltd., described at the time as “fine tuning rather than an extensive” quantitative easing.

The bank said it would extend the average maturity of its government bond holdings, announced a new program for exchange-traded fund purchases and said it would boost the maximum amount it can buy of any one real-estate investment trust.

“Tweaks to the stimulus framework in December have prepared the way for additional easing, so we’re in a situation where it wouldn’t be strange for the BOJ to act at any time,” said Keisuke Hino, a foreign-exchange trader at Mizuho in New York. Those expectations are supporting dollar-yen, he said.

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