Bracing for super-Wednesday – USD & JPY in the spotlight
Two of the three most important central banks will be in action this week suggesting not only the potential for considerable volatility, but also the possibility that it could set new trends in the forex markets.
The two central banks in question are the US Federal Reserve and the Bank of Japan. And to make matters worse it’s far from a done deal that former will raise rates and the latter will do nothing. However, the really important one is the Fed as what it says and does or doesn’t do could set the tone for USD for the rest of the year.
Since May, USD index has been pushing higher, though it remains firmly embedded in a consolidation pattern, which started right at the beginning of last year. The Fed could make or break that intra-consolidation pattern up-trend on Wednesday.
Fed chairwoman, Janet Yellen and numerous Fed governors are in favour of a move up in rates and have been for a long time. Unemployment is low, the economy is chugging along moderately and there’s a danger of wage inflation being triggered and potential credit bubbles brewing.
So what’s stopping them?
Previous rate hike attempts have been derailed by the UK’s vote to leave the EU and before that concerns over China’s economy. For the moment, both of those stories have sunk back into the background. Indeed, it now seems to be the norm that long periods of prevarication take place before the Fed finally acts – think back to the last rate rise and the taper tantrums before that.
The one thing that could hold the Fed back on Wednesday are the bitterly fought US elections. Doing nothing is likely to be less politically sensitive than acting, especially if it were followed by market turmoil. The last thing the Fed wants is to become embroiled in the vicious political debate between the two Presidential candidates. Besides two Fed governors favour caution – a fairly strong signal that there won’t be a move, despite all the pro-rhetoric.
A recent Reuters poll of economists (70%) thought the Fed will hike in December providing the world has not stumbled into some new crisis by then. Another poll by the FT overwhelmingly (85%) expects the Fed to stand pat this week. Almost as important as whether the Fed hikes rates is what it says. It should provide an update on its latest economic forecasts and give some clues over its intentions regarding interest rates, which could be a market mover in its own right.
The Bank of Japan, which holds its press conference earlier on Wednesday isn’t expected to change its monetary policy, but it is due to produce comprehensive review of its action and in particular negative interest rates, which it is widely expected to defend. If so this could set the scene for another step up in the BoJ’s monetary stimulus efforts in the months ahead, suggesting some temporary weakness for JPY.
In effect, the most important event this Wednesday may not be what these two central banks do – there’s a high chance they’ll both do nothing – but what they say they might do in months ahead.
That in itself creates scope for big moves and even more so if one of them does act after all.
TECHNICAL ANALYSIS: USD/JPY: Volatility draining down ahead of super-Wednesday
Since Sept 7, USD/JPY have been in a narrow range of 101.19-103.36 and with good reason. The fact that volatility fell last week and if that continues into Tuesday, it is a sign as to just how important Wednesday’s press conferences by the Bank of Japan and the US Federal Reserve are for the forex markets.
The long-term trend for USD/JPY remains downward with the short-term trend still sloping gently upwards. Since Dec 2015 those uptrends have presented good shorting opportunities. Whether that playbook is still valid could depend on what happens this Wednesday.
Indeed, there’s a chance of a double burst of volatility for USD/JPY on Wednesday. First the BoJ speaks on that day. Any suggestion that its vast monetary stimulus programme will be increased could trigger an up-move for USD/JPY, which could be accentuated later in that day when the Fed takes its turn to talk. As of last week the Fed wasn’t expected to raise rates, but it could still give USD/JPY another boost if it indicates several interest rate hikes over the next twelve months.
That’s one possibility. Another is that both central banks do nothing and say little that is particularly revealing.
The key support levels to watch for on Wednesday will be 101.73, 101.19 and ultimately 99.54 and it will take some quite dramatic news to pierce that last level. If Wednesday turns out to be uneventful the pair could end up settling close to the psychologically key 100.00 area as inactivity by both central banks should favour JPY, especially if the Fed talks dovish.
Key resistance levels can be found around 102.64, 103.36 and 104.08 with 105.00+ becoming target if it is apparent that the two central banks are pulling in very opposite directions on monetary policy.
By Justin Pugsley, Markets Analyst, MahiFX