Market synergies favoured a weaker JPY to an overwhelming degree in the first quarter as rising complacency and the aggressive Japanese government and BoJ rhetoric on JPY weakening was a match made in heaven, says John J. Hardy, Head of FX Strategy, Saxo Bank, in TradingFloor.com's Q2 Insights.

The brutal move in the JPY bottomed out in early March in recognition that everything thus far had been anticipation rather than reality. Just before we go to press, the BoJ unleashed a massive easing programme that is three times larger than the Fed’s current balance sheet expansion in domestic GDP terms, easily outstripping market expectations. At first blush, the market is celebrating the liquidity generated by this move. But this reaction pattern may change soon.

In Q2, the market may stop playing the JPY weakening as a boon to risk appetite and stimulus for a new carry trade and begin to worry that the Bank of Japan’s moves risk destabilization – whether in Japanese bond markets or trade relations. At some point, if the risk appetite/JPY weakening trade decouples, we could see sharp wild two-way oscillations in the JPY within the context of overall JPY weakening as the market struggles to find a new paradigm, and particularly if other Asian powers’ grumblings over the BoJ’s new policy escalate to protectionist threats. 

For more on TradingFloor.com's Insights for the second quarter 2013 see: http://www.tradingfloor.com/blogs/quarterly-outlook