Forex Today: BOJ policy tweak weighs on risk trade

Here is what you need to know on Tuesday, December 20:

Global equity indexes are suffering heavy losses on Tuesday in reaction to the Bank of Japan's (BOJ) unexpected policy tweak. The 10-year US Treasury bond yield rises toward 3.7% and US stock index futures are down between 0.6% and 1%. The US economic docket will feature Building Permits and Housing Starts for November. The European Commission will release the preliminary December Consumer Confidence report later in the day. Investors will keep a close eye on risk perception in the absence of high-impact macroeconomic data releases.

Following the December policy meeting, the BOJ left its policy rate unchanged at -0.1% and maintained the 10-year Japanese Government Bond (JGB) yield at 0.00% as expected. The BOJ, however, announced that they will allow the 10-year JGB yield to fluctuate between -0.5% and 0.5%, compared to -0.25% and 0.25% previously, and noted that they will review the yield curve control operation. Although this development by itself was not a big change in the BOJ's policy stance, the impact on the Japanese Yen was significant with investors possibly pricing in a hawkish policy step in the near future.

Risk appetite worsens on BOJ YCC move, Yen gains.

While speaking at the post-meeting press conference, BOJ Governor Haruhiko Kuroda reiterated that they will not hesitate to ease the policy further if necessary and noted that it was too early to debate an exit from the current monetary policy. "Today's decision on yield curve control is not an exit of yield curve control or change in policy," Kuroda explained and added that the decision was made on concerns of deteriorating market function threatening corporate financing.

BoJ’s Kuroda: Necessary to achieve 2% inflation target sustainably, stably in tandem with wage growth.

With the initial reaction to the BOJ's policy announcements, USD/JPY lost more than 500 pips from its daily high and slumped to its weakest level in four months below 133.00. BOJ Governor Kuroda's comments failed to help the pair stage a rebound. Similarly, EUR/JPY is down nearly 3% on the day, trading near 141.00 in the European morning.

EUR/USD fluctuated in a tight range during the Asian trading hours on was last seen trading at around 1.0600. 

GBP/USD closed virtually unchanged on Monday and extended its sideways grind early Tuesday. At the time of press, the pair was staying relatively quiet at around 1.2150.

Gold price managed to edge higher and reclaimed $1,790 early Tuesday despite rising US Treasury bond yields.

Following Monday's decline, Bitcoin regained its traction and was last seen gaining more than 2% on the day at around $16,800. Ethereum gathered bullish momentum and rose above $1,200, rising more than 3% on a daily basis.