BOJ Day –“ Brace Positions Please”

YEN- A Day of Reckoning 

The much-anticipated BOJ meeting is upon us and on cue, another headline intensifies speculation. Overnight reports have  Reuters source suggesting  the “Bank of Japan is considering specific easing steps” While the comment is vague, it does point to either a 20 basis point cut to – 0.3%, an increase in the asset purchase to ¥100 trillion from ¥80 trillion or some combination of the two. While this aggressive policy move is beyond the scope of current guestimates but even an aggressive expansion of the asset purchase program alone would be sufficient to influence the FX market, but a double barrel approach would indeed impart a significant fundamental impact and would send USDJPY rocketing higher. Also, some discussions centring on lowering interest rates on excess reserves, encouraging Domestic  Bank’s to lend is likely on the table.   This “ everything but the kitchen sink “ approach is not out of the realm of possibility  so either way we’re in for a very bumpy landing so “ Brace positions please.“

IN the meantime it’s difficult to gauge the strain, and psychological impact short term USDJPY traders have experienced courtesy of the headline whipsaws leading up to the  BOJ announcement. Not to mention the post FOMC disappointment which saw the USDJPY moving  sub 105

With the late headlines pointing to a more aggressive stimulus effort, the standard for the BoJ to not disappoint is exceedingly high.  However, given this week’s grind,  I suspect most short term traders are taking a wait and see approach. Therefore, the markets are likely to be extremely turbulent either way.

Keep in mind, the Bank of Japan Outlook Report is at 1:00 PM SGT and there will probably be some follow-up price action. I would expect Governor Kuroda will be grilled on helicopter money as the BoJ is indeed running out of current policy options. His responses could be significant drivers.

This day could get messy quickly if this policy decision backfires and fails to move the Yen currency needle on a weaker tangent. AS you can tell from today’s initial price action which has seen gaps below ¥103.75, it’s a guessing game at this stage.

This morning CPI data was close to expectations but not looking rosy, to say the least. Likewise, for the shocking decline in overall household spending in June  Similar metric for Retail Sales which  missed expectation. However, Industrial Production came in higher  than expected.While the data continues to wax dovish, I suspect the BOJ decision is in place so today’s data will likely have little influence.

  

Australian Dollar- Buy on Central Bank Easing Narrative?

The Australian Dollar, which has seen it fair share of speculative flows this week, is sitting quietly at the .7500 level with the spotlight on USDJPY; Aussie traders should be quiet in early trade.

The Australian dollar continues to find support. First, This week’s CPI  has influenced traders short term positioning as an  expected RBA rate cut is not  a guarantee  with FX market  current odds running 50:50

Also, the market decided the FOMC upgraded assessment of the US economy was not strong enough to alter the current Fed narrative, at least for this week. So,  AUD bears were more inclined to pare back shorts amidst broader USD weakness Also,  adding to the momentum was month end flows that were signalling a USD selling bias.

For today the biggest question mark will be the post BOJ  markets reaction to broader risk and how that plays out. Expectedly the   Australian dollar should be the mercy of shifting risk sentiment given the currencies unyielding correlation with investor risk appetite. However, this could be a little more delicate as the fall out the impact of a rate cut is less clear on how it will affect the financial sector stock on the NYK if the BoJ moves into the deeper negative territory.

The growing consensus is to buy Australian dollar on Central Bank easing rather than to position for RBA rate cut. I think risk appetite will dominate today’s session

However, with the massive global economic calendar ahead of us today, there will be no shortage of inputs.

USDASIA

Traders remain on tenterhooks awaiting the BOJ fireworks