Early Friday morning the BoJ meet and speculation is rising on whether they will start to signal the end of negative interest rates. A weak yen is creating problems for the domestic markets and raising interest rates would be a quick way to strengthen the Yen.
So, what would happen to the USDJPY if the BoJ surprised markets with a hike? The reaction would most likely be a continued move lower in US yields, and a sharp drop in the USDJPY as interest rate differentials narrowed between the Fed and the BoJ.
The BoJ have not hiked interest rates very many times in the last 50 years, but when they have the seasonality shows a bias for USD falls. The average fall has been -0.26% in the USD in the 4 days following the BoJ’s hike. So, keeping in mind that any hike on Friday would be a bug surprise, the reaction should be more marked and USDJPY selling more pronounced.
Major Trade Risks:
The major trade risks here would be if the BoJ signal the continuation of their ultra loose monetary policy.
Remember don’t just trade it, Seasonax it!