USD/JPY Yen rose yesterday after rumors of Cyprus seeking Russian bailout funds emerged. The amount of funds to be dispersed is suspected to be around 20 Billion EUR, twice the size of the promised 10 Bln EU bailout package and more importantly does not include any levies for depositors. This is an improvement of the “Plan B” mentioned by top government officials earlier that still include deposit taxes, albeit lesser than what was originally proposed by the EU. This improved risk sentiment and Yen weakened as safe haven flow continue to exit. Risk appetite was further improved when Ben Bernanke remained dovish during his latest press conference, stating that the FOMC is adopting a wait and see approach towards current economic improvements. Bernanke acknowledged that the labor market is getting better, though he expressed concerns on the sustainability of current growth. In the economic projections that accompanied the latest Fed decision, growth forecasts were lowered slightly. This is as dovish as you can get from Bernanke and the market actually traded higher on this news announcement. Certainly risk appetite is increasing, though it is disconcerting to know that a lot of the gains are attributable to the QE safety net so much so that we are willing to accept a bleaker future outlook just to keep the QE safety net going. This is akin to someone purposely hurting himself in order to get his regular fix of painkillers – symptoms of chronic drug addiction.
Across the Pacific Ocean, Japan readies herself for BOJ to go into overdrive. Kuroda is expected to make his 1st speech on monetary policy tonight at 6pm Tokyo. However, market doesn’t seem to be impressed with Yen pulling back significantly to trade below 96.0 round number. Price is currently below the 61.8% Fib retracement from 11th Mar decline to 18th Mar low. This Fib level is the confluence with Mar 19th peak and a breach below this level threatens to invalidate the recovery post Cyprus levies fiasco. Stochastic readings are heading lower, which add weight to the downside scenario. A good explanation on the lack of bearish sentiment today could be due to traders closing their short Yen positions before Kuroda’s actual announcement. Buy the rumor sell the news anyone?
Daily Chart is still bullish though, as long as price is able to keep itself above the 38.2% Fib and the confluence of ceiling back in Feb. A break above recent swing high will help to put bullish momentum back on track. However, that seems rather unlikely unless Kuroda is able to announce something that is above and beyond market expectations. We do not need to look far to find similar scenarios in the past: announcement of QE3 actually resulted in US stock prices hitting lower in the few months that followed, instead of pushing asset prices higher immediately. The likelihood of similar happenings right now is high, and traders should watch out for market sentiments AFTER the dust has settled rather than going in strong on the initial euphoria – EVEN if Kuroda surprise us with unconventional easing measures.
This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.