BoJ shocked the financial markets by announcing additional easing last week and overwhelmed all other major events. Yen tumbled sharply against all major currencies and reached a s seven year low against dollar. That also pushed Nikkei soared to close at 16413.76, at a seven year high. Risk appetite was also give a strong boost globally as DJIA closed at record high of 17390.52. S&P 500 also had a record close of 2018.05. In the currency markets, Aussie was marginally stronger than dollar as the strongest currency. Dollar followed as was boosted by more hawkish than expected FOMC statement. In particular, EUR/USD dropped through 1.2500 level to resume recent down trend.
To recap some of the key events. BoJ announced that the target for monetary base expansion was rated from JPY 60-70T to JPY 80T. The decision was not unanimously and was voted by 5-4. The central bank will buy at an annual pace of JPY 80T in JGBs, comparing to prior JPY 50T, at average maturity of seven to ten years comparing to prior average of seven years. In addition, BoJ will buy an annual pace of JPY 3T in ETFs and JPY 90b in J-REITS, comparing to prior JPY 1T and JPY 30b. BoJ Governor Haruhiko Kuroda said it's now a "critical moment for Japan to emerge from deflation" and thus the decision to expand the QQE. And, the announcement was a "pretty drastic step" and would have a "significant effect" on the economy. Separately, it's reported that the USD 1.2T Government Pension Investment Fund, or GPIF, will raise foreign investments holdings from 23% to 40%. That includes 25% of overseas stocks and 15% of bonds and is significantly higher than market's expectation of around 30% in total. Local stock holdings will be raised to 25% and domestic debt holding would be lowered to 35%. Some analysts noted that the reduction of domestic debt holdings to less than 40% was a surprise.
Fed announced to end the so called QE3 as widely expected and left rates unchanged near zero. The third round of quantitative easing began back in September 2012 and will total around USD 1.,6T in security purchases, including USD 818b in MBS and USD 785b in treasuries. It's expected that Fed's balance sheet would finally peak just shy of USD 4.5T, slightly higher than 25% of nominal GDP. While FOMC maintained the language of keep rates at current low level for a "considerable time", there are two points in the statement that gave the greenback a lift. Firstly, Fed upgraded its assessment on the job market as it noted that "labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate". More importantly, "a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing." That's was a significant change comparing to September's statement which mentioned that the slack was significant. Secondly, even though inflation will likely be held down in near term, FOMC maintained that " likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year." This suggested that Fed isn't too worry about the risk of disinflation.
RBNZ left OCR unchanged at 3.50% as widely expected. The most important change in the accompanying statement was that RBNZ dropped the line "we expect some further policy tightening will be necessary to keep future average inflation near the 2 percent target mid-point and ensure that the economic expansion can be sustained." In today's statement, RBNZ just said that "a period of assessment remains appropriate before considering further policy adjustment. This argued that the central bank might not raise interest rate again even if inflation climbs again.
Technically, DJIA's rally last week suggests that long term up trends from 10404.49 and 6469.96 are still in progress and has just resumed. Upside momentum isn't too convincing with bearish divergence condition in weekly MACD. Nonetheless, the index held well inside the long term channel. Also, strong support was seen from 55 week EMA. Thus, such up trend is still in relatively healthy state. Further rise should be seen towards channel resistance at around 18200 level next.
Dollar index surged to as high as 87.13 last week and the break of 86.74 resistance confirmed up trend resumption. Rise from 78.90 should target 88.70/89.62 resistance zone next. Based on current momentum, we'd probably see the index extend to 100% projection of 72.69 to 84.75 from 78.90 at 90.96. And, outlook will stay bullish as long as 84.47 support holds even in case of pull back.
Regarding trading strategy, our AUD/JPY short was completely wrong and was stopped out last week. We'd expect dollar strength and yen weakness to continue next week but we'd be cautious as markets might pull back to digest recent sharp moves. There are a number of key events next week including US ISM indices and NFP, ECB and BoE rate decision, Eurozone and UK PMIs, RBA and Aussie employment, New Zealand employment and Canada employment. Thus, we'd stay cautious at the beginning of the week first. We'll look at buying USD/JPY at a pull back to 110 resistance turned support in case the greenback retreats or yen recovers. And we'll sell AUD/USD on break of 0.8642 in case dollar gathers further strength without looking back.