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Bank of Japan tweaks policy with the yen slightly weaker


Market Overview

Although there is still very little direction to be found on forex markets, it is interesting to see bond markets reacting to the Bank of Japan monetary policy decision from earlier this morning. Speculation has risen in recent sessions that the BoJ could be about to make a key shift in policy, speculation that has caused longer dated Japanese Government Bond (JGB) yields to pull higher (the 10 year JGB has been above 0.1% and multi-month highs). This morning, the BoJ did a little tweaking on policy without making any decisive moves, maintaining its target for the 10 year yield around zero but allow its policy framework to be more flexible. In other word’s it will allow longer term yields to move higher. The key for the BoJ is to allow the yield curve to steepen and therefore generate better profits for stagnant banks and stimulate lending, all without strengthening the yen too much, which would be deflationary. This was probably the bare minimum the market was looking for and reaction has been for yields to unwind some of the recent moves higher, with the 10 year yield dropping around 5 basis points back to 0.05%. Interestingly, the yield on the 10 year Treasury has also fallen back 3 to 4 basis points, helping to mitigate currency moves. It may take time for the true reaction to come through, but aside from an initial choppy reaction weaker, the yen has not made any decisive moves and the BoJ has not spooked the bond markets to any real degree whilst giving itself flexibility for the future. The BoJ is a step down the tightening road, but it is clearly a very long road ahead still. Kuroda will be giving a sigh of relief. We now look to the Fed for its meeting statement tomorrow.

Bank of Japan

Wall Street fell for a second session yesterday as the tech stocks continue to come under pressure. The S&P 500 fell -0.6% at 2802 whilst futures are ticking around +0.1% higher this morning. Asian markets have been mixed to mildly higher (Nikkei +0.3%) whilst European markets are slightly lower. In forex there is an ongoing consolidation, with little move on the yen despite the BoJ, whilst markets look towards the Fed tomorrow. In commodities, there is little move on gold, whilst oil has slipped back a touch as OPEC production hit a 2018 high.

The long week of key data points really ramps up today and traders will be ready for key inflation data. The flash Eurozone inflation is at 1000BST and is expected to remain at +2.0% on the headline inflation (+2.0% last) whilst the core inflation is expected to tick mildly higher back to +1.0% (from +0.9% last month). It will be interesting to see how inflation develops across the region after yesterday’s very slight miss on German CPI. Across the Atlantic, into the afternoon there is the Fed’s preferred inflation measure, the core Personal Consumption Expenditure for June is at 1330BST, which is expected to remain at +2.0% on the year (+2.0% in May). Another important measure to look out for is the quarterly released Employment Cost Index for the second quarter which is at 1330BST and is expected to slip back to +0.7% (from +0.8% in Q1) and would suggest there is still something just holding back on wage growth. US Consumer Confidence is at 1500BST which is expected to remain strong but tick slightly lower back to 126.0 (from 126.4 in June).

 

Chart of the Day – EUR/GBP   

The underperformance of sterling seen across the forex majors is being reiterated through Euro/Sterling which has found support and is once more pulling higher. After the correction back from £0.8957 once more found support around the rising 21 day moving average (currently £0.8774) which has been a feature of the past few weeks, the market is looking to pull higher again. A couple of bull candles have come above £0.8860 and there is now a band of support £0.8845/£0.8860, whilst momentum is increasingly positively configured. The RSI has again held above 50/55 to push into the low 60s, whilst the Stochastics have again crossed higher to reflect weakness being bought into. The recent correction has also left a steeper uptrend of the past five weeks, coming in today at £0.8875 which also flanks with the 21 day moving average. With another positive candle forming today, the market is positioning for a retest of £0.8957 and whilst there will be direction taken from the Bank of England decision later this week, there is certainly a strong outlook for Euro/Sterling which does not bode well for the pound.

 

EUR/USD

The euro has settled down again after the mini wobble it had in the wake of the ECB monetary policy last week and is all but back to square one again. A second consecutive positive candle has rallied the market back towards the top of the converging trendlines again (which are now just 130 pips apart) whilst the Bollinger Bands are flat and very tight (at 140 pips apart) and momentum indicators are very much neutrally configured again. Resistance piles up around $1.1740/$1.1755 from throughout July, whilst the RSI is solidly between 45/55 and MACD lines almost entirely flat around zero. An uptick on the Stochastics relates to the two positive candles in the last two sessions. There is a marginal positive bias on the hourly chat, but nothing realistic to suggest an imminent upside break is about to be seen. Until a closing breakout above $1.1755 comes there is little real upside potential and the market will remain rangebound waiting for a catalyst.

 

GBP/USD

A tick higher on the market yesterday, with a mildly positive candle has helped to stabilise what looked to be a market moving with renewed selling pressure. The medium term bias remains negative within the downtrend channel, however, with momentum indicators lacking any real direction, this is a market in wait and see mode (both central banks announce monetary policy in the next few days). The hourly chart offers little else, with moving averages converged and flat, and momentum indicators very benign. Support at $1.3070 with resistance at $1.3215. Initial resistance today at $1.3150.

 

USD/JPY

The candlesticks have become increasingly settled in recent sessions, with the market moving sideways for almost a week now. There has been a shade of overnight volatility in the wake of the BoJ decision, but in reality there has been little real direction gained here either. Perhaps the European traders (or US this afternoon) will come in with a different perspective, but currently the market remains very neutral. Momentum is flat still with the RSI holding above 45 but stuck under 50, whilst there is a gentle drift on MACD lines back towards neutral. There is still a sense that the next move could be key though as the four month uptrend remains under pressure on a daily basis, without being decisively broken. The old highs of 111.15/111.40 also continue to hold back any renewed gains. A very frustrating market for now.

 

Gold

There is still a negative bias that is a drag on gold. The downtrend channel that has been in place for the past six weeks remains intact as the market ticks mildly lower. This is reflected in the bearish bias on the momentum indicators over the medium term basis. However the bulls will point to the lack of selling pressure as the market has moved sideways now for the past eight sessions and not retested the $1211 low. As several of the other major markets are, this is a market waiting for a catalyst. Resistance is in place at $1236 and is increasingly key. There is also a bias towards $1211 and testing $1204.50 (the July 2017 low), but for now the market waits.

 

WTI Oil

A strong bull reaction on the first day of the week has turned what looked to be a market in consolidation suddenly into a market looking towards a potentially a renewed positive outlook again. The bulls now need to hold decisively above the old pivot at $69.50, preferably with a second positive candlestick which would mean that the market would have built on a higher low at $68.25 to move towards a test of what is now a key near term resistance at $71.10. If the bulls can break through $71.10 it would now mean that a new higher low and higher high was being formed and the constitution of a new bullish trend would be underway. Momentum indicators are certainly warming to the idea, with the Stochastics edging higher now, and if the MACD lines can tick higher (having started to bottom) into a bull cross, this would confirm that a bullish recovery trend has renewed. Therefore support above $69.50 is a key requirement of today’s session, otherwise momentum in the move will be questioned.

 

Dow Jones Industrial Average

A corrective move in the past couple of sessions is now testing the continuation of the bull run. A decisive negative candle which fell over half a percent and closed just a shade above the session lows is now bang on the support of the four week uptrend. The move yesterday has already broken the support of the breakout 25,367 (the 61.8% Fib) and 25,400. Another negative candle today would also now break the uptrend. For now the market is very near term corrective and the bulls still have a grasp on proceedings. The hourly chart shows that the hourly RSI has just unwound back towards 40, MACD lines back towards neutral and the Stochastics at a level where previous lows in July have formed. However, support is key over the next session or so, and the bulls will be struggling to retain control if another bear candle forms. It would also mean that bullish daily momentum would begin to roll over. Trading clear of the 61.8% Fib level re-opens the 50% Fib level at 24,980. Closing back above 25,367 would reinvigorate the bulls, with key resistance near term now at 25,587.


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At Hantec Markets Ltd we provide an execution only service. Any opinions expressed by analyst Richard Perry should not be construed as investment advice or an investment recommendation. This report does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. Forex and CFDs are leveraged products which can result in losses greater than your initial deposit. Therefore you should only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved, seeking independent advice if necessary prior to entering into such transactions.