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Bank of Japan interest rate decision preview

The Japanese central bank is set to keep monetary policy unchanged, but the safe-haven yen has other factors to contend with.

Japan Source: Bloomberg

Among the central bank ‘majors’ that have recently announced their monetary policies – the US Federal Reserve, European Central Bank, and Swiss National Bank – they’ve thus far kept their rates unchanged as expected. And while expectations are for the Bank of Japan (BoJ) to keep its policy on hold, the yen is expected to experience volatility on another front.

When is the BoJ’s monetary policy announcement set to take place?

The BoJ’s monetary policy announcement is this Thursday, 19 December, and will feature its monetary policy statement, policy interest rate, and a press conference thereafter featuring the BoJ’s governor Haruhiko Kuroda.

In terms of the economic background going into the event, the current government lead by its Prime Minister Shinzo Abe already approved a $120 billion stimulus package earlier this month to bolster growth and aid its infrastructure. This was done to aid its export sector that has been struggling as global trade has remained tested and demand weakened. Manufacturing data disappointed with the latest purchasing managers index (PMI) figures out of Markit showing a sub-50 contraction, Tankan’s manufacturing index reading last week came in at 0 – lows unseen since 2013 – and its services reading dropped for a third consecutive month. On the retail front the data has been more disappointing, as the sales tax increase for the first time in five years from 8% to 10% that occurred in October meant retail sales dropped over 7% and household spending contracted, and where in the housing sector the latest housing starts figures contracted for a fourth consecutive month.

Expectations heading into the BoJ’s monetary policy announcement

As it stands, expectations heading into the event is for the Japanese central bank to keep its key policy rate on hold at -0.1%, continue its asset purchasing program snapping up government bonds, and in the process aid its yield curve control (YCC) programme that targets both short-term and long-term policy interest rates. That would mean its balance sheet would continue to increase, as it currently holds assets greater in value than the country’s gross domestic product (GDP). As for its October meeting, it gave a clearer signal of a rate cut, Kuroda saying it could take negative rates lower to prevent global uncertainties from harming the export-oriented economy.

But given the announcement of the recent US-China trade deal and a no-deal Brexit far unlikelier, those global uncertainties have declined, and have improved sentiment which have sent equities globally higher, and dented the safe-haven yen’s attractiveness. The BoJ’s members wouldn’t only note a weaker yen but embrace it, as that would help its export-oriented economy in selling their goods at a cheaper price and stimulate its battered manufacturing sector and reduce chances of any further monetary easing for the time being.

Hence, even if inflation remains below the central bank’s 2% target, its unlikely they would change their monetary policy especially following the fiscal package approved by the government, with the central bank set to finance that package by its continuing purchase of government bonds. Furthermore, not a lot of tools remain in the central bank’s arsenal to stimulate demand should a real crisis emerge, and as a result it may opt to avoid reducing rates further at this Thursday’s meeting.

USD/JPY retail and institutional sentiment

So where have traders positioned themselves prior to the event? In terms of sentiment, the latest commitment of traders (CoT) report released last Friday shows the bias for the yen among larger speculative traders at a heavy short 67% (ie heavy long 67% USD/JPY), whereby yen long positioning dropped 6469 lots on the week before, but was met with a larger drop in yen shorts by 10,610 lots and hence has kept the bias as a percentage unchanged. The bias among them has usually been heavy long against the yen, with a brief exception occurring from August through October where – anticipating ‘risk-off’ scenarios – they piled into the safe-haven yen.

As for retail traders, the bias shifted from yesterday morning’s slight majority long 52% to a majority short 57% as of this morning, as long traders tested by a lack of continued upside movement have opted instead to close out longs and initiate shorts at the ¥109.7 resistance level.

USD/JPY client sentiment

USD/JPY Daily Chart with retail and institutional sentiment

Looking at the chart below with retail sentiment plotted in the blue dotted line and CoT sentiment in the green dotted line as % long bias, retail bias has shifted and has been range trading the recent price moves, where as institutional bias has slowly positioned themselves for an upside move consistently raising their majority long bias since October until now.

USD/JPY daily chart

USD/JPY’s technical outlook and overview

USD/JPY technical outlook

From a technical standpoint, it’s a bull trend whereby its price is at a short-term resistance level, and where its weekly bull trend line is barely holding. However, we’ve been here countless times before with its daily technical overview outlook shifting plenty of times on the lack of momentum, with a crucial difference trader impatience running out more quickly and shifting to majority short.

Its price is above all its main moving averages on the daily chart and piercing the upper end of the band. More interesting is its weekly outlook, where nearly all of its main technical indicators are flashing green with a positive directional movement index (DMI) and a trending average directional index (ADX).

How to trade USD/JPY

When it comes to trading this pair, there are a few factors to take into consideration including

  1. Thursday’s BoJ monetary policy announcement should it surprise and opt not to keep monetary policy unchanged as expected
  2. The safe-haven yen which usually moves opposite risk appetite and hence an inverse relationship between fresh record highs in US indices/higher highs for global indices that could translate into a weaker yen
  3. The overall appetite for the US dollar

Conformist technical overview strategies would give preference to buy strategies be it at the first resistance level for a breakout move beyond ¥110.16 or off its first support level of ¥108.6 but after a reversal (waiting for the level to break first by a margin and initiating the buy after it rises back up). Contrarian traders can consider going against the current technical overview but face the risk of getting stopped out on a sell at the first resistance level should the yen weaken significantly, and hence stop losses should be made very tight to avoid getting pulled into a potential move towards the second resistance level near ¥111.00.

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