Japanese Overnight Call rates traded 0.963 Friday and 0.964 Monday. Viewed from the negative side, Monday traded minus 0.036 and minus 0.037 Friday. Monday’s range was minus 0.070 to + 0.001 or 0.93 lows to 1.001 highs. Why the BOJ decision to go negative the Call Rate is to borrow low and lend high by positioning the Call Rate below complementary interest rate maturities. Yen Tibor trades from 1 week to 1 year from 1.0090 to 1.1280. On the JPY offshore side, Euroyen rates trade from 1 week to 1 year from 1.0090 to 1.1240. Euroyen traditionally since its 1998 inception trades below Yen Tibor for purposes of not only investments off shore Japan but for purposes to repatriation. Repatriations are done at the start of Japanese market opens. Why the up pattern at Japanese market opens is a factor to reinvest repatriation proceeds. Once repatriations are completed, down goes Japanese markets.
The location of Yen Tibor is above Europe’s Eonia but below UK Sonia and Fed Funds. Euroyen trades above Europe and below Fed Funds and UK Sonia. This situation is typical Japanese methodology. Viewed from exchange rates, JPY/USD traditionally trades above JPY/EUR. USD/JPY from 116.00 to 117.00 trades JPY/USD at 0.008620 and 0.008547. EUR/JPY at 122.00 and 123.00 equates to JPY/EUR at 0.008196 and 0.008130. Takes 66 pips in JPY/EUR to move EUR/JPY 100 pips. Takes 73 pips in JPY/USD to move USD/JPY 100 pips. The better mover is EUR/JPY.
Call Rates in terms of Japanese yields trades above the 5 year yield at 0.92. The 5 year is the only closest companion to Call Rates along the yield curve. The 3 month, 2 and 3 year trade currently at 0.60, 0.82 and 0.89. The borrow low, lend high scenario operates smoothly in Japanese markets. Eonia as a comparison, borrow at Eonia must lend at least to the 3 month maturity because the 1 week to 2 month trade below. Europe markets lack proper functionality.
A drop in the Call Rate must remain above Europe and below Fed Funds to maintain the Japanese tradition. Only problem in the Call Rate are longer term maturities are far to high. Consider the curve average is 0.0628, OIS at 0.03 and longer maturities are running at 1.12’s. The Call rate at 0.96 has room to travel lower in relation to current Eonia at 0.64.
USD/JPY has two vital points, below at 114.20 and above at 117.43. Both drive USD/JPY for the remainder of the week but slight changes will be seen as prices move higher and lower.
Brian Twomey, Inside the Currency Market, btwomey.com