Will the Bank of Japan Stir Up the Forex Market?
|Within the context of central bank risk events, it's been a long time since a Bank of Japan (BoJ) meeting had the potential to move the needle.
This might change tomorrow as last week's shift in Japan's JGB curve structure impacted bond market yields throughout the G-7. The BoJ caught the market's attention by offering to buy unlimited 10-yr JGBs at 11 basis points last week. And even though there we no willing sellers, the seed of change within the BoJ's policy directive has been planted.
From a currency perspective, Forex traders will try to work out how deeply the BoJ is feeling that the current stimulus operations, which includes a yield curve control (YCC) scheme designed to keep 10-yr JGBs at 0%, is unsustainable and needs to be tweaked higher.
Going into tomorrow's meeting, BoJ watchers are split on whether Mr Kuroda and his team will consider a policy change with Japan's inflation rate remaining below the central bank's 2% target.
At this point, the consensus is that the BoJ would not begin to officially lift the JGB yield target until March of 2019. However, after last week's surprise move on yields, some analysts have moved that target date backwards to October of this year.
It certainly makes sense that if Mr Kuroda is planning to start engineering the 10-year yield higher in October, he will want to send up a test flag to see how the market will respond. It's our belief that any serious chatter out of the BoJ about positive 10-yr rates will push USD/JPY lower.
Technically, the USD/JPY appears to be breaking down. Based on longer-term trend lines, a break of the 110.55 level could extend as low as 109.70.
Bank of England (BoE)
It's widely expected that the Bank of England (BoE) will lift the official bank rate from .50% to .75% on Thursday. This will be the first time in over 11 years that rates have been snugged higher and we believe Mr Carney will boost the market's expectations for additional tightening in his statement.
This will be good news for the GBP/USD, which has dropped during 9 of the last 10 weeks including the last 3 weeks in a row. Technically, a NY close above the 1.3225 level would improve momentum indicators and give scope for a move to 1.3300.
For the last 10 weeks, the EUR/USD has traded within the band of 1.1500 and 1.1800. The pair has not posted a NY close below 1.1500 in over a year and hasn't closed above 1.1800 in nearly 2 months. The European Central Bank (ECB) has not been an asset for Forex traders as they have not signalled any meaningful policy change during the last three meetings.
From a rate differential perspective, we believe the range is far more likely to resolve to the downside than the upside.
Like the Euro, the AUD/USD has spent the last 2 months in a broad .7300 to.7500 range. This week's high-frequency data schedule will include the monthly trade balance and the retail sales report. Both of these data sets have the potential to move the market, but we don't expect to see the recent range challenged prior to Friday's US payroll data.
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