With action finally expected from the Bank of Japan tomorrow, it should create volatility for traders regardless of whether they act or not. BOJ surprised markets on the 29th January 2016 by going into negative rates of -0.1, a move that was designed to achieve 2% inflation “at the earliest possible time”. Well, three years and 9 months later, core CPI hasn’t been anywhere near 2% and is now just 0.5% YoY.
Going off headlines earlier this month, expectations for BOJ to go further into negative territory tomorrow had been on the rise. Yet optimism of trade talks between U.S. and China may remove the immediate argument for action, although it remains apparent that BOJ have been laying the groundwork for some action.
Just some of Kuroda’s comments in October (newest to oldest)
Considering that (the lack of) inflation expectations were a key reason as to why BOJ went into negative rate sin the first place, then oil prices inflation expectations could be the easiest guide to decipher whether they’ll go further into negative territory and how far. Yet whilst there are multiple mentions of cutting rates, he does also speak about further stimulus. So as per usual, BOJ are keeping markets on their toes despite their vow to be more open with any forward guidance. Taking the above into account, BOJ appears set to do something, even if it means just spelling out what they’ll do at a later meeting.
This could include:
How did markets fare when BOJ went into negative rates?
So the basic pattern following negative rates is to see the yen strengthen (USD/JPY, AUD/JPY etc, lower) and stocks weaken (most notably the banking sector). So, if BOJ neither cuts rates nor hints that they will, we’d expect a rally in these markets following the meeting.
USD/JPY: The daily structure remains bullish, although traders appear cautious around the highs. A small, bearish doji formed yesterday and a bearish divergence has formed with RSI. Interestingly, the overnight implied volatility (ON IV) range falls near 108.25 support and 109.31 resistance, meaning options markets are suggesting a 62% chance prices will close within these levels.
EUR/JPY: Regardless of the outcome today, the bullish trend structure on EUR/JPY appears firm and trades in a potential bull flag pattern just off its cycle high. A very minor pullback has been seen and Monday’s bullish engulfing candle suggests the low could be in at 120.35. Whilst it trades within a bullish channel, we’re open for it to break above the upper trendline (hence the dashed line) given the strength of bullish momentum within the channel.
NZD/JPY: Here, the structure appears less convincing for the bull camp. A bearish pinbar and engulfing candle reaffirmed the resistance zone for NZD/JPY is around the 50% retracement level and the two bearish bars from high show all is not well at these less-than-giddy highs. Furthermore, another pinbar appeared yesterday just above 68.98. Given the longer-term bearish channel, large overlaps of price action between swings in its current ‘bullish’ channel. Price action continues to look corrective against the bearish channel.