BOJ Finally Lifts ZIRP But Yen Weakens

Talking Points

·          AUD Trade Balance deficit explodes

·          BOJ finally lifts ZIRP raises by 25bp

·          Italian CPI in line

·          RetailSales on tap for US

In what was perhaps one of the least surprising  policy moves of the year the Bank of Japan finally lifted its Zero Interest Rate Policy for the first time in six years at tonights Monetary Policy meeting.  The BOJ raised rates from zero to 25bp but hinted that no further rate hikes may be forthcoming for the rest of the year.  In the post announcement press conference Governor <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Fukui noted that rate adjustments will be gradual with the BOJ not planning consecutive raises. As a result USD/JPY actually rallied spiking as high at 116.15 before settling near the 115.75 level. With the market having priced in three possible hikes of 25bp by the end of 2006, tonights news played right into the hands of yen bears who have argued that BOJ actions vis a vis the lifting of ZIRP are largely symbolic rather than substantive. However, longer term players may want to consider two following points.  First, at 115.00 or above USD/JPY presents a very favorable exchange rate for Japans massive export sector which should in turn lead to acceleration  in the growth of countrys GDP in the second half of the year.  Secondly, with oil prices hovering near the 80/bbl level Japan, which imports 99% of its crude demand, is likely to see significant increase in inflationary pressures, especially at the wholesale level.  This combination of faster than expected growth and rapidly rising price levels is likely to pressure the BOJ to become decidedly more hawkish as we approach 2007. Thus, while the days of the USD/JPY carry trade may not yet be over, they certainly appear to be coming to an end.  <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

In US today the markets will focus on Retail Sales which are likely to be one of the key determinants of whether or not the Fed will raise rate at  the August FOMC meeting. Preliminary evidence on retail data is mixed with Walmart same store sales for example rising only 1.2% at the low end of its forecast. Clearly higher gasoline prices and a slowing housing market are having some depressing impact on consumer spending. On the flip side however, rising wages may be offsetting some of these negatives.  For the past 12 months every time the University of Michigan Consumer survey increased in value, as it has in its last reading, Retail Sales figures improved as well.  The market anticipates a rise of 0.4% for June and if the number meets or beats those forecasts, the expectations for an August Fed hike will likely  increase as well.

FX Upcoming