YEN – A Day of Reckoning
The much-anticipated BOJ meeting is upon us and, right on cue, another headline has intensified speculation. Overnight, reports from a Reuters source suggested that the “Bank of Japan is considering specific easing steps.”
While the comment is vague, it points to either a 20 basis point cut to –0.3%, an increase in the asset purchase to ¥100 trillion from ¥80 trillion, or some combination of the two. Such an aggressive policy move is beyond the scope of current guestimates, but even an aggressive expansion of the asset purchase program alone would be sufficient to influence the FX market. A double barrelled approach would indeed impart a significant fundamental and would send USDJPY rocketing higher.
Along with the comments, some discussions that are centred on lowering interest rates on excess reserves, which could encourage Domestic Banks to lend, is likely on the table. This “everything but the kitchen sink” approach is not out of the realm of possibility.
Either way, we’re in for a very bumpy landing, so “Brace positions please.”
Meanwhile, it ‘s hard to gauge the strain and the psychological impact that short-term USDJPY traders have experienced lately , courtesy of headline whipsaws, in the lead up to today’s BOJ notes. Let alone the post FOMC disappointment, which saw the USDJPY moving sub-¥105.
Of late, as headlines pointed to more aggressive stimuli, the bar has been set high for the BOJ I suspect most short-term traders prefer the wait and see approach. Either way, the markets are likely to be extremely turbulent this afternoon.
The Bank of Japan Outlook Report is to be released at 13:00 SGT and I expect some follow-up price action. I also expect Governor Kuroda will be grilled on helicopter money, as the BOJ is running out of current policy options. His responses could be significant drivers for forward guidance.
If the expectations for the policy backfire if the BOJ fails to move the Yen currency needle on a weaker tangent, the day could get messy, quickly. Initial price action today has already seen gaps below ¥103.75, and it is still a guessing game at this stage.
This morning’s CPI data print was close to expectations, but the outlook is not rosy. A shocking decline in overall household spending in June means the data continues to wax dovish. Similarly, the metrics for Retail Sales with missed expectations. However Industrial Production came in higher much higher than expected. Regardless, I believe the BOJ decision is in place already, so today’s data is unlikely to have influence.
Australian Dollar- Buy on Central Bank Easing?
The Australian Dollar (AUD), which has seen its fair share of speculative flows this week, is sitting quietly at the .7500 level while the spotlight is pointed at USDJPY. Aussie traders are quiet in early trade.
The AUD continues to find support from traders, as this week’s CPI has influenced short term positioning and as the FX market has put current odds of the RBA implementing a rate cut at 50:50.
The market has also decided that the FOMC upgraded assessment of the US economy was not strong enough to alter the current Fed narrative, at least for this week. So the AUD bears have been more inclined to pare back shorts amidst broader USD weakness. Adding to the momentum is the month end flows that have been signalling a USD selling bias.
For today, traders are waiting on the post-BOJ announcement to see the market’s reaction to broader risk and how that plays out. Expect the AUD to be at the mercy of shifting risk sentiment, given that these currencies have an unyielding correlation with investor risk appetite, which could prove to be a little more delicate as the fall out of the impact of a rate cut is less clear on how it will affect the financial sector stock on the NYK, should the BOJ move deeper into negative territory.
The growing consensus is to buy Australian dollar on Central Bank easing rather than to position for RBA rate cut. I think risk appetite will dominate today’s session, however, with the massive global economic calendar ahead of us today, there will be no shortage of inputs.
Traders remain on tenterhooks awaiting the BOJ fireworks.
Traders remain on tenterhooks awaiting the BOJ fireworks