BoJ – A Déjà vu moment for the markets

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Taro Aso, Japanese minister of finance. Copyright by World Economic Forum by Sebastian Derungs

The BoJ event today is reminiscent of the ECB’s event in December 2015, where extreme rise in market speculation led to being caught off guard and yet again reminding traders of some important lessons.

Shock, surprising are perhaps two of the most commonly used terms that are being used to describe today’s Bank of Japan’s (non-) event. Surprising as it may seem, today’s market reaction brings about a déjà vu moment. Dial back to December 2015 and the ECB meeting memories shows a similar scenario playing out. Markets price in an event very strongly built on assumptions and rumors only to see these expectations being squashed.

Central banks thankfully don’t run monetary policies based on market expectations (at least to a certain extent) and more importantly, when it comes to influencing currency rates, its takes some subtle moves rather than unleashing policies as a direct response.

EURUSD Reaction during the December 2015 ECB Meeting
EURUSD Reaction during the December 2015 ECB Meeting

Indeed, today’s BoJ decision was close, if one looks at it objectively. The yen has been steadily rising, hurting exporters, Japan’s inflation is heading nowhere, and business outlook remains bleak. When the yen fell to 108 levels in early April, the Bank of Japan officials along with some from the government came out in defense of the currency. As an export-oriented economy, Japan’s reliance on a weaker yen as a means to boost exports can be debatable, but going into steering monetary policy merely because a currency has made strong moves is unthinkable. History shows that in a ‘free floating’ environment, central banks, despite their powers can do little to influence exchange rates. The Russian central bank dabbled with the Ruble not so long ago in the height of the US and EU-led sanctions against the country, but soon enough the central bank gave up defending its currency letting the markets decide on its value.

And who can forget the Swiss Shocker in January last year?

It is surprising (pun intended) to note that research and commentary articles post the BoJ decisions express a level of surprise, especially when considering that over the past week, since the Bloomberg article which stoked expectations saw a mere over speculation on what the BoJ will do. For a central bank that prefers to use the “shock and awe” factor, one can only question the sustainability on the yen’s decline given that the expectations were so strongly priced in.

USDJPY - BoJ Reaction, April 2016
USDJPY – BoJ Reaction, April 2016

By leaving policy unchanged, the Bank of Japan has in fact managed to keep the guessing game going. Yes, there could be further easing on monetary policy. But the when is the big question. At the very least, the price action on the yen over the past week should serve as a reminder for speculators who are excessively inclined to bet on the yen’s rally. While we await the weekly CFTC CoT positioning, it will no doubt serve as an interesting read, considering that just last week speculator’s were net long on the yen pushing it to one of the highest levels.

While the BoJ has done nothing, it did manage to achieve one aspect, which is to keep the markets guessing on what and when the next policy change might be. This should deter further speculative bets on the yen at least for the time being. In the near term, the 108/107 levels on USDJPY is likely to hold ground. Focus will shift to economic data from the US over the coming weeks which could see a possible rate hike in June, which is currently priced in very low.

While the long-term yen is still biased to the downside, the current downtrend should see signs of easing as the USDJPY could be in for a decent and a rather much-needed pullback.

USDJPY – Where to from here?

  • The long term bias is mixed, but there could be signs of a move to the upside. This view, stretching over a year or more is expected to see USDJPY eventually rally back with a possible target of 130yen. Detailed analysis of this view can be accessed here.
  • In the medium term, there is a possibility that USDJPY could be retracing its losses. 117/118 remains a level worth waiting for, as it would mark a retest of the weekly head & shoulders pattern, but resistance levels at 112, 114 need to be cleared to achieve this. Details on this analysis can be accessed here.
  • In the very short term, the yen remains a mixed bag, with 108/107 playing a key support role. A conclusive break below this level could quickly extend USDJPY losses to 105/104 levels, which (just like 117/118) remains a very good level to keep an eye on to the downside

Lessons for traders

  • When an event is as hyped up such as this and the markets have priced in a strong move already, there is no point chasing the markets as it opens a downside risk;
  • Monetary policy decisions are never a binary event. There are well-documented cases where a currency can react opposite to the policy decisions being made. Think EURUSD rally in March this year;
  • Rumors are only rumors until they are validated as facts.


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