More volatility beckons for JPY
The Bank of Japan delivered a shocker last week – unusually by doing nothing – which sent JPY soaring and leading to some commentators believing that the central bank may have thrown in the towel in its fight to reflate the economy. But don’t bet on it.
Expectations were running high for more action by the BoJ. Economic numbers remain poor and March consumer prices fell 0.3% proving that deflationary forces are alive and well and the trend is moving further away from the BoJ’s 2% inflation target.
Within minutes of doing nothing, USD/JPY plunged 2.6% -- a move, which left a lot of traders nursing heavy losses. Unchecked, USD/JPY risks rapidly plunging towards 100, a level not flirted with since 2014.
But there is a good reason why the BoJ may not have acted last week and it’s political. Japan has come in for intense international criticism over its devaluation moves and recently made a commitment not to manipulate its currency. Acting last week would have been too soon and ruffled feathers with the global community.
And proof that the BoJ isn’t giving up is that it has moved its target for achieving 2% inflation to sometime in 2017 rather than H1 2017. However, it is already committed to its quantitative easing programme of 80tr JPY (around 730bn USD) a year and has rates at -0.1% (may not be much scope to lower a lot further for fear of damaging the banking system).
When it feels the timing is right it could do even more QE – theoretically there’s no limit to how much money a central bank can create, even printing presses don’t pose physical limitations anymore, as it’s all done electronically. But the thing is, it just isn’t working.
Very likely the BoJ at some point, maybe later this year or sometime next year, could try ‘helicopter Money’ or ‘monetary financing’ whereby the central bank directly funds government expenditure or a cash handout to the population to stimulate inflation and demand. Given the sheer strength of the deflationary forces at work – it might work for a while and shouldn’t result in a Zimbabwe style inflation meltdown, providing it isn’t done over the top.
Another option of course is to hope something happens with USD ie that it starts rallying again. This week sees a raft of US data from ISM manufacturing PMI and non-manufacturing PMI, services PMI culminating on Friday with Non-Farm Payrolls. The number is expected to be around 200,000, but if it were to surprise on the upside, say come in closer to 300,000, then USD could be back off to the races, especially if wages are rising as well, and USD should soar against JPY.
In the meantime, this week will be fairly quiet for Japan as there are a series of public holidays and even some continental European countries will have a day-off.
Whatever happens this week, the BoJ is unlikely to tolerate JPY soaring into the stratosphere with all the implications that carries in terms of deflation and exports.
TECHNICAL ANALYSIS: USD/JPY – nearing consolidation
With plenty of public holidays this week around the world, forex markets are likely to be thinly traded meaning that exchange rates could be stable or very volatile.
A big challenge with trading USD/JPY is the presence of a hyper-active central bank ie the Bank of Japan, which sometimes acts outside expectations as it did last week causing the third big downward move this year in USD/JPY. The other two being in early February and late March to early April. However, though both were quite fast moves they did play out over a period of weeks. Last week’s did so in just two days.
Usually, short sharp violent moves result in a levelling out or a violent snap back and with the two previous big downward moves, USD/JPY did have a pullback into a consolidation pattern. There’s a strong chance that USD/JPY will repeat this pattern this week – much will depend on US data and if the BoJ decides to do some verbal intervention in response to last week’s action.
In the meantime, the daily RSI ended Friday being close to oversold and on this year’s previous big downward moves it did become oversold. Also, the pair have pierced the lower Bollinger band, which is usually a sign that a reversal isn’t far off.
For this week, action could well take place around the psychologically important 106.00 area – either as resistance or support -- on USD/JPY. If 106.00 gives away, 105.70 could provide support otherwise it’s all the way down to 105.00 – the next key psychological area. Resistance is placed at 106.82, 107.09 and 108.01-10.
However, a period of consolidation is likely to be in store soon, if not this week.
By Justin Pugsley, Markets Analyst, MahiFX