BoJ Policy Meeting to Give Markets Direction
Sun, 10/02/2011 - 2:00am
On Friday, the USD/JPY began trading in the New York session at 76.93 after short covering was seen from funds with short US Dollar positions. Later, activity reversed, as weaker data in US spending and personal income sent spot prices to a 76.70 low. This move was aided by a widening in bank spreads and SEC news stories that suggested possible moves from the rating agencies (implying additional credit downgrades). Stock markets did see some lift later (a JPY negative) as macro data released later in the session came in moderately positive. Going forward, we will see macro releases out of Japan, which will provide some short term volatility for the currency. This data will come in the form of the Bank of Japan interest rate decision but given the recent weakness seen in the region, the consensus does not expect the BoJ to move on its policy strategy. Evidence supporting this expectation was seen with Wednesday’s retail sales data, which showed a large drop in August (-2.6 percent from the previous month and 1.7 percent from last year). This shows us that the strength of the JPY is weighing on export companies and intervention rhetoric could once again find its way into the discussion. With no change in rates expected, we could see additional weakness in the JPY if the BoJ chooses to inject liquidity at regional banks as a means for stimulus. Another factor to keep in mind is that the recently elected Finance Minister (Azumi) is not as highly regarded within the government as his predecessor (Naota Kan), so many analysts are expecting the policy goals of the Prime Minister (strong interventionist policy) to be the main factor in whether or not Japan will use its leverage to weaken the Yen on its own. The key question is the price level the government is willing to tolerate, so further losses beyond 76 in the USD/JPY will likely be limited. Technicals: The USD/JPY is seeing a moderate bounce off of the messy longer term double bottom in the low 76 area. Prices managed to break resistance at 77 but follow through was limited and prices only made an advance of 20 pips. With this in mind, buying dips is more favorable than breakouts, and the first support level (buy zone) comes in at 76.50.