USDJPY: The BOJ Delivers a Halloween Treat to Bulls

In today’s Asian session, the BOJ shocked traders by increasing its already-massive Quantitative Easing program by another 30 trillion yen per year ($270B), bringing the total yearly purchases to a total of 80 trillion yen ($725B). To put this program into context, it represents an annual injection equal to roughly 14% of Japan’s GDP, dwarfing the recently wound-down QE programs in the US (6% at the peak of $85B in monthly purchases). The central bank also stated that it would triple its purchases of ETFs and REITs, as well as extending the duration of the bonds it buys.

As you would expect with such a bold expansion of an already-controversial program, the decision was highly contentious, sneaking through the normally agreeable 9-member BOJ by just one vote. In addition, news that the massive government pension program would be dramatically increasing its holdings of Japaneses equities helped stoke a big rally in Japan’s Nikkei index.

Combined with Wednesday’s less-dovish-than-expected statement from the Federal Reserve, today’s news creates crystal clear policy divergence between the Fed and the BOJ, and USDJPY has surged to a new 7-year high near 112.00 as a result. Economics 101 tells us that as long as the Fed continues to inch toward rate hikes next year (stoking dollar demand) and the BOJ continues to print yen (increasing the supply of yen), USDJPY could continue to trend higher.

Technical View: USDJPY

Taking a look at the chart, there are clear skies ahead following today’s breakout. Though not yet complete, today’s price action has put in a potential Bullish Marubozu Candle* on the daily chart, signaling strong bullish momentum and a likely continuation higher next week. Meanwhile, the secondary indicators are also constructive, with the MACD turning higher off the “0” level and the RSI reaching back into overbought territory.

In our view, the next major resistance levels to watch are the 78.6% Fibonacci retracement of the 2007-2011 drop at 113.75, and key previous-support-turned-resistance at 115.00 (not shown). As long as rates stay above the previous high at 110.00, further gains will be favored over the medium term.

* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.