USD/JPY jumps north of 120 on negative BOJ-rate

On Thursday, trading on global markets was choppy, as the Fed failed to give a clear guidance. A further rise in the oil price combined with volatile equities provided a mixed picture for interest rate markets and for currencies. In the end, the dollar lost slightly ground against the euro with EUR/USD closing the session at 1.0940 (from 1.0893 on Wednesday). USD/JPY held in the high 118 area and ended the day at 118..82 (from 118.68). Investors were reluctant to be yen long ahead of BOJ policy decision.

This morning, the focus is on Japan. The BOJ surprised friend and foe as it decided to apply a negative deposit rate on some bank reserves. It added that further interest rate cut were possible if negative. The Bank now expects that it will only reach its inflation target by fiscal H2 2017 (early 2018). At the same time, it maintained its target to expand the monetary base at an annual rate of JPY 80 trillion. Japanese markets initially reacted very volatile. An initial sharp rise of Japanese equities was undone, but a new up-leg occurred later in the session. Investors were probably uncertain on the impact of the new measure as the BOJ will apply its policy rate in a complex 3 layer system. Even so, the Nikkei closed 2.8% higher. USD/JPY jumped temporary north of 121, but trades currently in the 120.50 area. Chinese equities markets also gain about 3%. Gains on other Asian markets are much more moderate gains. Oil trades slightly stronger with Brent holding north of $34 p/b. The dollar trades also slightly stronger against the euro. EUR/USD is drifting back to the 1.0905 area.

Today, the calendar is well filled. In Europe, the focus is on the January EMU CPI. We see upsides risks (expected at 0.4% Y/Y for the headline and 0.9% Y/Y for the core). However, after Draghi’s commitment and lower oil prices, we don’t expect an upward surprise to have a big negative impact on the euro. In the US, the employment cost index, the first estimate of the Q4 GDP, the Chicago PMI and final Michigan confidence will be published. The consensus for GDP are reasonable. In theory, stronger US data could be slightly supportive for the dollar. However, one shouldn’t expect USD investors to become really enthusiastic if the GDP beats a low consensus estimate. So, the focus for USD trading will probably be on the impact of the BOJ decision on global markets.

In a first reaction, the BOJ policy step supports risky assets and the dollar. This pattern might continue at the start of the European trading session. Question is how long this risk-on reaction and its positive impact on the dollar will last. The BOJ action was a surprise and might weigh on the yen short-term, it is no game-changer for global FX trading. In a day-to-day perspective, EUR/USD might ceded some ground after the recent rebound. However, we expect EUR/USD to hold within recent ranges.

From a technical point of view, EUR/USD failed also to sustain below 1.0796 support (07 Dec low) earlier this month. This area was again tested at the end of last week/this week, but a break didn’t occur. Next support is at 1.0711/1.0650 (correction low: 76% retracement off 1.0524/1.1060) and at 1.0524. On the topside, 1.0985/1.1004 (reaction top) is a first reference. This level was left intact even as sentiment was outright risk-off before the ECB meeting. Next resistance comes in at 1.1060/1.1124 (15 Dec top: 62% retracement). We expect this resistance to be difficult to break. We look to sell EUR/USD on upticks for return action lower in the range. The picture for USD/JPY improved as the pair rebounded above 120 this morning in the wake of the BOJ policy meeting; Even so, we are reluctant to position for further sustained USD/JPY gains.

Sterling rebounds

Yesterday, choppy trading conditions in the likes of EUR/USD also filtered through in sterling trading. A decent UK Q4 GDP growth also left its traces.
EUR/GBP jumped higher in line with EUR/USD early in European dealings and touched an intraday top in the 0.7660 area. The UK Q4 GDP was reported at 0.5% Q/Q and 1.9% Y/Y. The figure was in line with expectations, but (currency) markets apparently feared a weaker report. Sterling rebounded both against the euro and the dollar. EUR/GBP closed the session at 0.7618. Cable also rebounded off the recent low and closed the session at 1.4362. Oil holds near the short-term highs which is a slightly positive for sterling.

Overnight, the GFK consumer confidence was stronger than expected. Sterling remains well bid, but this is probably due the global positive sentiment in the wake of the BOJ policy decision. Later today, there are no important eco data in the UK. Day-to-day sentiment on sterling improved this week and the technical rebound might continue today if global sentiment remains positive. However, long term issues for sterling are not out of the way.

•  Download Full Sunrise Market Commentary Currencies