The Bank of Japan policy is under pressure

The Bank of Japan policy is under pressure

An extremely active twenty-four hours in all asset markets in what was expected to be an extremely busy and no less noisy week for currency traders.

Currency markets were extremely active with traders primarily looking for opportunities to sell dollars. Not only is the big 2018 consensus trade, long EURO, sniffing recent highs, but now Yen traders are getting into the act, despite the fact that BoJ Kuroda attempted to ice a soaring JPY 

To summarise: the dollar fell as if it had an anvil around its neck, as did US yields Tuesday, while US stocks remained relatively bid on stronger earnings. Similar to last week, we’re back plumbing significant support on the DXY ( 90.10), and again suggesting a break lower would make a convincing argument for a steeper drop in the dollar. But unlike last weeks attempt the dollar bears are back en masse with the JPY bulls pulling the cart this time around.

Japanese Yen’s Reaction to BoJ Rate Decision

Going into the BoJ, as mentioned yesterday, traders adopted a mindset that with Japans economy firing on all cylinders and signs of deflationary pressures abating, they would buy Yen regardless. Thinking that it’s just a matter of time before the market does the tightening for the BoJ.(i.e. similar to what’s going on in the EURO )

Price action said it all; the dollar sold on the rate announcement and when  USDJPY failed to gain any traction above 111.20 after Kuroda dovish press conference, it was game on for the dollar bears. However, for the Oldtimers dialling in on the real nuance within the statement, the proof was in the pudding. “Prolonged downward pressure on financial institutions’ profits under the continued low-interest-rate environment could create risks of a gradual pullback in financial intermediation and of destabilising the financial system. However, at this point, these risks are judged as not significant, mainly because financial institutions have sufficient capital bases.”

So the system is bust, and the BoJ will need to tweak the YCC by perhaps moving down the curve targeting shorter dated tenors as currency markets have typically enjoyed a stronger relationship with the short end of the yield curve.

But the big challenge for the BoJ is how to deal with investors expectations as any tweak in policy will be viewed as an opportunity to hammer the USDJPY mercilessly lower. However, the issue at hand if the US yields continue to fall we will most certainly test the 110 level, and with a convincing break, all hell could break loose.

Energy Markets

OIL

Brent nudged above 70 for the first time this week after the IMF report concluded that the markets are in the midst of broadest synchronised global growth spurt since 2010.

The IMF’s beaming economic forecast along with stout compliance from OPEC and comrades in arms through 2018 and possibly beyond is providing convincing support.Comments from Saudi oil minister Khalid al-Falih over the weekend continue to resonate that the cartel and its allies should extend their production pact quota beyond 2018. While this all sounds fine and dandy, but ultimately absolute price points and missed opportunity costs will be the essential arbiter in future discussion, not Saudi oil minister rhetoric.

Nat Gas

China’s voracious energy consumption is coming to the fore as their nascent environmental movement takes hold all but suggesting Coals days are finally numbered, but LNG’s outlook looks outrageously bright. Without question, China’s switch from coal to natural gas is sending demand through the roof pushing up LNG prices to three-year highs.Given that its early days in China Green Movement, LNG producers are probably smiling after shooting themselves in the foot last year by oversupplying the markets.

Gold Markets

Gold could move higher as we are still in the early stages of a broader USD sell-off, with all eyes  focused on 110 USD JPY

Besides the political hot spots in the middle east providing support, investors are looking to hedge equity positions. Investors are spooked by a possible escalation of trade wars and are becoming jittery about overextended equity valuations. All of which is pushing investors back under golds safety umbrella.

G-10

The Australian Dollar

Aussie tumbled yesterday as Iron ore plummeted amid US trade sanctions and discussions. Iron ore got hit lower as the Trump tariffs caught markets in low a physical demand period ahead of Chinese New Year which toppled Iron ore prices and crushed the Aussie dollar. Naturally, given Australia significant role in the global supply chain, there was a risk wobble as the market came off pretty hard. But we have subsequently based around. 7960 

While I think Trade War Escalation is a bit of a Red Herring, Trump is a wild car so better not to take anything for granted. However, the edge did come off the mini trade inspired currency tantrum when the TPP agreement was rejuvenated and then  Trump suggested NAFTA negotiations were going on well.  A  definite scare for long Aussie positions, but its game on this morning. 

But let’s face it. the political optics of trade sanctions directed at China and South Korea are poor given that both countries leaderships are key backroom negotiators to resolve North Korea problem

The Euro

Without repeating the bullish EUR views, Buy on Dip

Malaysian Ringgit

Despite a bit of a risk wobble overnight on the back or trade discussions, the sun shines on the Ringgit again this morning. The combination of firmer oil prices .broad-based US dollar weakness and positive risk sentiment on the back an IMF report that suggested we are in broadest synchronised global growth spurt since 2010, has the Ringgit positioned favourably heading into tomorrow MPC

MYR vs Possible Trade Wars.

The the first salvo was launched today in what could develop into a long drawn out ” tit for tat” trade battle between the US vs China and Korea, and possibly the rest of Asia. The US administration imposed tariffs on imported solar panels and washing machines, in a move towards what could develop into the trade war between some global economies.

EM Asia will be following these developments closely as trade-related fears are probably the most prominent external risks since most regional economies are very trade oriented.

However, given the Ringgit is less sensitive to external shocks than regional peers due to surging oil prices.

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.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes
Stephen Innes

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