Citigroup Recommends Bullish Dollar-Yen Trade Ahead of BOJ Decision

Citigroup foreign exchange strategists are recommending clients position for a rebound in the U.S. dollar against the Japanese yen, arguing that the Bank of Japan is likely to disappoint hawkish market expectations at its upcoming policy meeting.

The Strategic Call

In a note to clients on Thursday, the bank recommended buying a one-month USD/JPY 160.50/162 call spread. This options strategy is a bullish bet that would generate a profit if the dollar-yen exchange rate rises above 160.50, with maximum gains realized if the pair reaches or exceeds 162.

The recommendation follows a day of significant volatility in which the yen surged, causing the dollar to fall 2.5% to 159.40. Market analysts widely attributed the sharp move to suspected intervention by Japanese authorities to support their currency.

Contrarian Rationale

Citigroup's strategists believe this yen strength may be short-lived and that the Bank of Japan will struggle to deliver a sufficiently aggressive policy update to sustain the currency's gains.

Ad

"We do not think Governor (Kazuo) Ueda will be able to ’outhawk’ expectations at tonight’s BoJ meeting, which could lead to a disappointment," wrote Daniel Tobon, a senior FX and macro strategist at Citigroup. Tobon suggested the yen's rally might have been an incentive to push the currency pair lower ahead of the event, setting the stage for a reversal.

Market Outlook

Should the Bank of Japan deliver a statement or outlook that is less hawkish than traders are anticipating, the rationale for holding the yen could diminish, prompting a recovery in the dollar-yen pair.

Citigroup anticipates that such a scenario could trigger a move higher in the currency pair immediately following the central bank's announcement. "We see scope for a bounce back in dollar-yen tonight with upside follow through after," Tobon's note concluded.