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USD/JPY and the BoJ adding another dimension

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Jan 31, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Guatemala) - Last week, markets were taken by surprise on the BoJ's move when they announced it would adopt a negative discount rate. The implications of doing so are not only damaging to the Yen in the immediate term, but this should be alarming to the financial world in the essence that key global authorities are preempting a worsening global outlook and are taking radical actions to help prorogue the headwinds.

    "The BoJ called the move “adding another dimension” to its policy tool box, which analysts at ANZ noted the Central Bank now has three dimensions: quantity (money base increase at JPY 80trn per annum); quality (asset purchases – principally JPY 80trn/per annum JGBs, also JREIT and ETFs); and now, negative rates. "The two main reasons why the BoJ has done this are: first to force financial institutions to either lend out or invest in risky assets any money that they receive from selling JGBs to the BoJ under the QQE, and second, to extend the life of its current easing policy given its inflation goal is proving elusive.""

    USD/JPY knee jerk could be short-lived medium term

    The immediate effect has seen a sharp fall in the Yen. The Yen dropped over three big figures vs the greenback on the knee jerk when USD/JPY rallied from 118.44 to a high of 121.68. However, and keeping in mind the Yen's safe haven status, while the move irradiates the obvious downside risks in the Japanese economy and currency, it should tell us another story that in fact might not be all that supportive to a continuation of the upside in USD/JPY, given that the US is not immune to recent and the accelerated deterioration of global markets stemming from China.

    Over the weekend, the FT reported that economists see 20% chance of US recession. "The fear that the world's largest economy — considered the lone engine of global growth — is on the verge of recession has intensified. In the FT's December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months...The economists downgraded their expectations of the US central bank's ability to tighten policy this year, with their median forecast coming in halfway between two and three 25 basis point rate rises in 2016. Half of those surveyed said the Fed would lift two or fewer times.""

    From here on, data and the US economy will be to be scrutinized intensely and markets may become even more sensitive to each output from the US economy. This week ahead has plenty to offer, including the all important jobs data.

    USD/JPY levels

    Valeria Bednarik, chief analyst at FXStreet explained, "The short-term technical picture suggests some consolidation ahead, given that the technical indicators in the 1 hour chart have retreated sharply from overbought levels, but the price remained near its highs.

    In the 4 hours chart the technical indicators are giving signs of upward exhaustion in extreme overbought territory, yet remain far from suggesting a downward movement, in line with the shorter term perspective. The pair has advanced beyond the 61.8% retracement of the latest daily fall around 120.60. As long as the level holds, bulls will retain control of the pair, with a break above 121.70 opening doors for an advance up to the 123.50 region where the pair will complete a 100% retracement."
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