Conspiratorial Musings

October 31st, 2014 7:51 am | by John Jansen |

Via a fully paid up subscriber:

The BoJ decided to sail further into QE waters earlier today and at the moment there are bunch of things we know about this move and a bunch of questions unanswered (known knows and known unknowns I guess?). Here 3 quick points that come to my mind immediately.

 
1-On the surface the BoJ’s move today is in response to some weaker CPI and growth data that come months after the VAT hike in April. Indeed if you peel through the BoJ’s forecasts on CPI and growth etc etc {NSN NEAOO46JTSEP <go>} and have a sense for recent dataflow you can make the argument that the facts changed and as such they decided to change their policy.
 
2-But this is Japan and you always have to dig deeper. The conspiracy theorist in me can’t get past the fact that the move to step up JGB purchases (and backended ones at that {NSN NEARPV6S972U <go>}) comes less than 48hrs after the Fed officially ended its QE program and on the same day that Japan’s largest pension fund GPIF has announced a politically charged asset reallocation out of JGBs and into a whole bunch of alternatives {http://reut.rs/1zlDK6S}
 

3-Clearly the majority of market participants were not expecting this at all. Having said that USDJPY was the one USD cross that closed more or less on its highs yesterday as the GPIF chatter was announced late in our session (other USD pairs were kinda cool to to a stronger than expected Q3 GDP print y’day as month end flows seemed to trump it). We also saw a ton of pricing requests in yesterday afternoon in USDJPY (and some crosses) on what we thought was a reaction to GPIF (but now wonder if someone didn’t know something). This seemed to leave dealers short of 1m-3m options and today the market is scrambling to get those tenors in paying up to 9.9 in the 1m from last night’s close around 7.75 – (in fact we saw 9.9 paid then the market drifted lower to 9.4 where someone bought 1bn and it traded up at 9.6-9.7 next). This is a level in implieds not seen since Jan. There defiantly was some legacy barrier clean up on the 110 handle too which is exacerbating things but overall there has not been a lot of barrier supply over the past month or so. So net-net it feels like someone somewhere had the sniff on this took USDJPY higher yesterday afternoon and left the options market offsides which will exacerbate the move in the short term (and could make pull backs painful too)

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