Tokyo Traders’ Equinox Break Disrupted by Fed, BOJ Meetings

  • Investors holding off from large wagers as meetings loom
  • Japan off on Monday, Thursday to sandwich key policy decisions

Bond and currency traders looking for liquidity this week face three major obstacles: the Bank of Japan, the Federal Reserve and Japan’s holiday calendar.

Investors have been holding off from making large wagers before Wednesday’s policy decisions by the Bank of Japan and Federal Reserve. Worsening liquidity means any transaction -- no matter how small -- can hit markets disproportionately hard. The twin meetings fall in between national holidays in Japan -- Respect for the Aged on Monday and the Autumnal Equinox on Thursday. While Treasuries trading in Asia will be closed on those days, currency transactions will continue in the 24-hour foreign-exchange markets.

“I am anticipating some of the price moves will be exaggerated because of a drop off in liquidity,” said Stephen Innes, a senior trader at Oanda Corp. in Singapore. “The market is not as deep as what it would be because of the nature of these two high-risk events coming up.”

Financial markets in Japan are closed on Monday to honor the nation’s elderly and again on Thursday in a week locally called a “Silver Week” during which some go to the cemetery to pray for the ancestors. One-week implied volatility in the yen, a measure of exchange-rate swings, surged last week by the most since July, when the BOJ underwhelmed markets with a stimulus boost that fell short of analyst expectations.

Holiday Watching

Koichi Takamatsu, Tokyo-based head of Group-of-10 spot trading at Nomura Securities Co., said Thursday may not be quite be a holiday for him after all as he will start to monitor the markets early in the morning. With traders largely ruling out a U.S. rate hike this week and the BOJ as hard to predict as ever, Takamatsu is bracing for surprises.

“Given how rate-hike expectations are slim, the pain would be to deal with the risk-off market should the Fed actually raise rates,” he said. “Dollar-yen moves will probably be dictated by the BOJ’s decision the day before.”

The gap between one-week and one-month implied volatility in the dollar-yen cross spiked last week to the widest since just before the last BOJ meeting, as the shorter tenor surged.

With so little consensus on what BOJ Governor Haruhiko Kuroda will announce on Wednesday, many investors have refrained from making bets on the likely policy outcome and desks are unlikely to be “staffed more than usual,” said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo.

“I don’t expect any big move before the BOJ,” he said.

Uncertainty surrounding the Fed meeting may deter many Japanese investors from holding their positions overnight before the holiday on Thursday, said Rodrigo Catril, a currency strategist at National Australia Bank Ltd. in Sydney.

“Whatever reaction we may get after the BOJ on Wednesday, this move could well be reversed depending on what the Fed does and or says early on Thursday,” Catril said.

— With assistance by Hiroko Komiya

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