The Biggest Hidden Danger of the Last Super Central Bank Week in 2024 - Bank of Japan
Will the Bank of Japan make another surprise attack on the global market?
With the release of the U.S. non-farm payroll and CPI data in November, the market has almost fully priced in a 25bp rate cut by the Federal Reserve in December. The market is betting on the 'certainty' of a December rate cut, believing that the Federal Reserve will once again lean towards a larger cut, as it did in September (September was 25bp vs. 50bp, December is 0 vs. 25bp), to address the 'uncertainty' of monetary policy since Trump's presidency.
Mark Cabana, head of U.S. interest rate strategy at Bank of America, expects a 25 basis point rate cut this week but also states that future cuts will be more gradual. He pointed out that the Federal Reserve is concerned that failing to cut rates would disappoint the market, thus they will cut rates this week. However, if inflation remains high for an extended period above the policy target, the risk of inflation expectations becoming unanchored would be the situation the Federal Reserve fears most. If there is a risk of unanchored inflation expectations, and inflation remains high or accelerates again, the Federal Reserve will be forced to raise rates, a scenario that has not yet been priced into the market.
The yen against the dollar has fallen for seven consecutive days and has broken through the 154 mark.
Although the market believes the possibility of the Bank of Japan raising rates this week is less than 20%, considering that the Japanese government recently upgraded the economic growth rate data for the third quarter, removing barriers to a rate hike, and the Bank of Japan's preference for 'surprise attacks', who would dare to let their guard down?
This summer, amid heart rate irregularities and angina (liquidity issues) in the U.S. dollar, the Bank of Japan suddenly raised rates, triggering a global market explosion. The wave of deleveraging in yen carry trades was unprecedented, and global stock markets evaporated about $6.4 trillion in three weeks, with the Nikkei 225 index experiencing its largest drop since 1987. The current situation is somewhat similar.
According to Bloomberg's analysis of data from the Japan Financial Futures Association, Tokyo Financial Exchange, and the U.S. Commodity Futures Trading Commission, Japanese retail investors, leveraged funds, and foreign asset management companies increased their short positions on the yen to $13.5 billion in November, far exceeding October's $9.74 billion, reaching 62.5% of the July peak of $21.6 billion. Short positions on the yen are expected to continue rising rapidly, indicating that yen carry trades are 'reviving'.
