From the Floor: USDJPY lies in wait for D-Day fallout
- USDJPY coiling ahead of bank meetings in Japan and US
- Markets would get 'tremendous shock' if Fed moved on rates — Hardy
- Short-term risk of USDJPY 'punching lower' before going higher — Hardy
- USDJPY at sub-100.0 levels not 'sustainable' — Hardy
- O/n USDJPY vols spike to second highest since start of Abenomics — Larsen
- Gold still stuck in post-Brexit range before big meetings
- Gold needs break below $1,300/oz to determine its direction — Hansen
- Shortlived oil rally leaves Brent looking over its shoulder at $43.75/b — Hansen
By Martin O'Rourke
We've mentioned on numerous occasions that markets have moved into wait-and-see overdrive in the run-up to the Bank of Japan and Federal Open Market Committee meetings over the next 36 hours but USDJPY looks to be coiling with a potential push on the 100.0 handle quite possible.
"Former BoJ board member Sayuri Shirai has come out and said that negative rates should be the way forward and the focus should be shifting away from quantitative easing," says Saxo Bank's head of forex strategy John J Hardy. "The double whammy would be if the Fed were to actually raise rates and I think the chance that it will do so is more than the 20% currently priced in."
"I wish they would actually go ahead and do it as it would show some political independence but that would be a tremendous shock to markets," says Hardy. "It would be a huge risk for risk appetite and this reach for yield theme but the Fed certainly does not like to surprise too much."
USDJPY has retraced back towards the 101.70 area and a move lower is the most likely scenario facing the pair in the immediate short term.
USDJPY could get pushed below the 100.0 handle:
"There is a short-term risk of punching lower before going higher," says Saxo's forex chief. "If we go through 99.50, then we could perhaps test to 95.0, the lows going back to 2012."
"Overall, we still prefer the long calls and we don't see USDJPY below 100.00 as sustainable but the best way to look at this might be through options."
Ahead of the BoJ meeting, overnight USDJPY vols spiked to 37, a 160-pip move for a straddle reports Dan Larsen from the FX Options desk in Copenhagen.
"The implied volatility shows vols are a touch lower than we had for the July meeting but still the second highest since the start of Abenomics," he says. There has been a lot of buying of USD calls in the interbank market."
Larsen sees USDJPY upside at the 102.30-103.25 zone and points to 99.50 as the key number to the downside.
Japan's Topix index was also sparking as speculation that the BoJ would buy Topix in its ETF purchases, reports Edmund Liu from Saxo Bank's Singapore hub.
The Topix aside, equities overnight were relatively capped in no small part due to yet another reversal for oil as the rally Monday proved predictably shortlived.
"Nigeria said it was ready to ramp up production and then Libya announced the reopening of a port and that is all adding to the supply overhang," says Saxo Bank's head of commodities strategy Ole Hansen. "Buyers should sit out for the short term before we get the inventory report Wednesday."
Wednesday's EIA is slated for a 3 million barrels build.
"We're seeing a test back towards the August lows and if we see Brent through $45.50/b, then the next target is $43.75/b."
Brent looking back to sub-$45/b levels:
Gold has been largely rangebound since the Brexit vote three months ago but the two big bank meetings could finally be the spur for a break of the parameters.
"We've been in this $1,305-25/oz zone and not a lot is happening as we are very much on hold," says Hansen. "The BoJ, dollar and real yields are still the key drivers."
"To get a breakout, we need to get below $1,300/oz to then gauge how much support the market has," says Hansen.
It's rather a different picture in the sugar market which, after months of sideways movement suddenly sparked into life Friday and has continued that momentum into this week.
"We're looking at the 50% retracement of the 2011-15 selloff and this is largely based on an expected supply deficit in 2017," says Hansen. "Hedge funds have been sitting on record longs for months and more than happy to see the momentum on this one extend."
"We could be looking at $23.10 on sugar."
Sugar pops and the momentum is likely to continue:
AUDUSD was on the rise overnight after the Reserve Bank of Australia minutes reaffirmed its stable outlook but Hardy is downbeat on the prospects for the economy.
"It's crunch time for Australia as it is over leveraged and it is poorly positioned for a credit slowdown," he says. "I can see recession in 2017 for the first time in a generation."
Could there be an upside or downside surprise for USDJPY after
the big central bank meetings Wednesday? Photo: iStock
Martin O'Rourke is managing editor at Saxo Bank
Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.