Article / 29 July 2016 at 7:50 GMT

FX Update: Knee-jerk JPY rally may be a red herring

Head of FX Strategy / Saxo Bank
  • BoJ fails to satisfy market's demand for stimulus, yen rallies
  • Large-scale reaction to central bank move seen in JGBs overnight
  • RBA, BoE and early-month US data all on next week's event risk calendar

Mount Fuji
At the heights: The JPY responded to an underwhelming BoJ stimulus package
by rocketing to the skies, but the story is not likely to end here. Photo: iStock

By John J Hardy

The Bank of Japan announced a major expansion to its ETF purchases, nearly doubling the rate to ¥6 trillion per year from the previous pace. It also announced measures to help banks with their USD funding (USD funding has become an issue lately as new US money market rules go into effect soon that have USD Libor backing up steeply recently and pressuring global banks that need USD funding).

The market reaction quite obviously points to a market that was expecting more, as USDJPY has settled toward the key 103.50 area in the wake of the announcement, though we remain due to get further colour from BoJ governor Kuroda’s press conference later this morning. 

One point worth noting in the statement was the reference to the coming fiscal stimulus and the belief “that these monetary policy measures and the government’s initiatives will produce synergy effects on the economy.” In any case, it is widely recognized that the BoJ is maxing out its JGB purchases unless the fiscal expansion proves large enough that some purchases can be allotted to fund the stimulus. 

Also interesting to note the very large reaction in JGB’s to the announcement overnight, as the 10-year yield leapt about 10 basis points higher. Most importantly, the stakes have been dramatically raised for the September meeting as the BoJ statement indicated that the bank will “conduct a comprehensive assessment of the developments in economic activity and prices under QQE and QQE with a negative interest rate as well as these policy effects at the next monetary policy meeting.” 


USDJPY knee-jerked lower, but found stability in the area we talked about recently around 103.50/25. If the market continues to focus on BoJ futility, we could see the pair running lower still toward the last key zone ahead of 100.00, in the 102.50/00 area. 

If the impulse is instead to consider the bigger picture, and whether the switch to a fiscal and eventual helicopter money focus in Japan will push the JPY back weaker, things would look a little different. 

The overhead levels couldn’t be clearer, with the Ichimoku cloud firmly etched as the technical resistance that must be overcome to set the pair on the path to perhaps 110-111.00.


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Source: Saxo Bank 

Today’s action will be about sorting out the market sentiment on the Bank of Japan meeting/guidance and Kuroda’s press conference and then we’ll be on to looking at next week’s minefield of event risks, including the Reserve Bank of Australia on Tuesday, the Bank of England on Thursday, and all of the usual first week of the month data out of the US. 

In the US presidential race, the polls next week will give us an idea whether the “convention bounce” from the Democratic convention this week can match the bounce for Trump from the Republican convention.

The G-10 rundown

USD – the USD is on its back foot in the wake of the indifferent FOMC statement and the USDJPY dump overnight, but next week’s rich US economic calendar is more critical for stimulating shifts in the Fed expectations due to the Fed’s data dependency.

EUR – watching for the EBA stress tests today; the market doesn’t seem to be taking this as a large event risk, but large shortfalls in capital requirements could lead to more political pressure to do something, especially on Italian banks’ NPL problem.

JPY – focus on BoJ futility, but for the JPY to follow through notably higher we’ll need to see the details of prime minister Shinzo Abe’s plans for the economy. The MoF’s approach to issuing debt from here will also be scrutinised – could the recent stories about 50-year JGB’s prove correct after all, for example? In any case, the switch to a fiscal/helicopter money focus is on.

GBP – next week’s UK data and the BoE are the next event risks of note – interesting that minor new highs in EURGBP failed to hold overnight. If the BoE decides interest rate cuts are futile, this could help ease downside risks for the pound, though the near-universal expectation is for a 25 basis point cut (making guidance more important, especially any opinion expressed on negative rates.)

CHF – EURCHF pushing lower and running out of range toward 1.0800 – interesting today whether EBA stress test report has any bearing here. Getting a bit contrarian on the USDCHF move, especially if US data is reasonably strong next week – will watch 0.9700/0.9675 as last ditch tactical area there.

AUD – RBA next Tuesday the next key risk as AUDUSD refuses to make a directional commitment, keeping the bears in business but without confirmation (which starts with a break down through 0.7450/00.

CAD – the USDCAD rally is trying to hang in there as the bearish reversal from new highs has failed to bite lower. The surrender level for the bulls looks like 1.3100 on the close today – weak oil prices pressuring CAD recently.

NZD – NZDUSD rolling over again after another feeble rally; this suggests the consolidation rally may be yielding to fresh downside, with the critical 0.6950/0.7000 and all of its structural implications in view.

SEK – today’s Swedish GDP will be key for whether the long-term range toward 9.60-plus can contain SEK weakness.

NOK – weak oil prices pressuring NOK and local resistance in EURNOK giving way, opening up the last resistance zone toward 9.70/75.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0800 – Norway Jul. Unemployment Rate 
  • 0900 – Euro Zone Jul. Flash CPI / Jun. Unemployment Rate / Q2 GDP Estimate 
  • 1030 – Russia Central Bank Rate 
  • 1230 – Canada GDP 
  • 1230 – US Q2 GDP Estimate 
  • 1330 – US Fed’s Williams to Speak 
  • 1345 – US Jul. Chicago PMI 
  • 1400 – US University of Michigan Final Sentiment 
  • 1700 – US Fed’s Kaplan to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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