The Lessons From the Carnage

The BOJ and RBNZ yesterday were a shining example of just how much dovishness the market demands from central bankers. The yen rocketed higher after the BOJ and the kiwi was the next best performer while the US dollar lagged. We take a look through the wreckage of the yen pairs. There are 2 JPY Premium trades, one taken today after the BoJ, the other 24 hours prior to the BoJ on expectations the BoJ would nothing.

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The Bank of Japan decision to leave policy unchanged was merely a postponement of more action but the market crushed yen shorts in 200-400 pips moves. It's a lesson in the fallibility of CFTC futures positioning data. Those numbers show a crowded yen long trade but they don't reflect the build-up of structural and real-money bets on the yen to fall. Those trades were running for the exits Thursday.

The tell was the comment from Abe advisor Honda who correctly predicted the BOJ wouldn't act this time around and correctly forecast the surprise cut in January.

Ashraf also correctly predicted the BOJ and was quick to sell AUD/JPY after soft Australian CPI.

What's striking is how aggressively currencies are rallying when central banks don't act. The RBNZ tried to replace action with a dovish bias and jawboning but it wasn't nearly enough. Stevens has used the same playbook for years but the market has grown immune to it. If he doesn't deliver action then Australian dollar will surge but the good news for AUD bears is that he will now surely recognize what's at stake.

The stakes have surely been raised in yen trading after Thursday's moves. The spot to watch in the day ahead is USD/JPY as it flirts with the April low of 107.60. It has 55 pips of breathing room at the moment but the lack of a sustained bounce in US hours isn't comforting for the bulls. Real money tends to chase big breaks so the pain could be far from complete.

Data to watch in the hours ahead includes the 0130 GMT Australian PPI report. The prior year-over-year reading was 1.9%. A soft number would add even more weight to the CPI miss. The other data point at the same time is private sector credit, which is expected up 0.5%.

Most important will be a speech from the RBA's Debelle at 0345 GMT. Watch for clues about the May 3 RBA decision, they could be a major AUD mover.