Traders expecting fireworks from today's BOJ meeting

Taking a look at USD/JPY one-day options volatility we can see that at 52 this is the highest read since 2008 and the second highest ever.

Source: Bloomberg
  1. It’s Bank of Japan (BoJ) Day. For short-term traders, very little else matters today.
  2. Yesterday, USD/JPY overnight implied options volatility was at the highest since 2008 and the second highest level of all time. The market is positioned for fireworks!
  3. There are reports that the Abe government are pressuring the BoJ to increase monetary stimulus. This has pushed USD/JPY above ¥105 and should support the Nikkei on open.
  4. While USD/JPY has pushed higher, the USD index has fallen for a fourth day with a loss of 0.4%. Expectations of a hike from the Federal Reserve sit at 44% for December.
  5. The S&P 500 closed off the lows with a gain of 0.2% and the NASDAQ at +0.4%. Amazon and Alphabet produced excellent results in after-market trade and both names should be core portfolio holdings.
  6. ASX 200 to see another day of gains. The grind towards 5600 continues, with our call at 5580. June private sector credit (+0.5%) and Q2 PPI data points shouldn’t get a huge amount of focus today.
  7. AUD/USD traded in a range of $0.7487 to $0.7549. Price currently resides mid-range and today’s Australian data should have little bearing. AUD/JPY is naturally the cross to watch.
  8. Oil should be on everyone’s radar, with US crude falling a further 2.3% from yesterday’s ASX cash close. The momentum is accelerating to the downside; stay short or at least cautious.
  9. Iron ore is going the other way, with a gain of 3.5%.
  10. Also on the radar tonight will be earnings from Exxon, as well as the results from the European bank stress test. US Q2 GDP is due at 22:30 AEST, with consensus of +2.5% year-on-year.

Without going into the mechanics of implied volatility, what we can deduce is that the market is expecting a real rip today and positioned for huge volatility. The obvious instruments to keep an eye on today are JPY and Nikkei, but what materialises in these assets today will have large multiplier effects in other markets such as the Chinese yuan, US futures and even the ASX 200. While there is no set time, the announcement can take place anytime between 12:00 AEST and 15:30 AEST and this is where the liquidity will dry up and we could see random spikes in price as the market get nervous and the algo’s prepare to react to literally any headline they see.

The market is positioned for easing from the BoJ and this could come in many guises. It’s interesting to hear the Abe government are reportedly pressuring Mr Kuroda et al to bring their A-game today. The government have effectively detailed the outlines for a ¥13 trillion of new fiscal measures, as part of a sizeable ¥28 trillion package, although it has largely failed to excite the market and now it’s up to the BoJ to go hard or go home. Many feel this has been rushed through to put additional pressure on the BoJ.

The open of the ASX 200 should result in another grind higher, with 5600 in sight again. We are staring at a fifth day of gains on the local market and with ASX 200 having a 34 points average daily range (ATR) over the last five days, one would put the probability of a third week of gains around 97%. We would presumably need to see the Bank of Japan do absolutely nothing (which could easily happen!), but perhaps even give an assessment they are done easing for this to occur.

Based on their respective ADR’s we should see BHP fall 1.4% on open, while the banks should be at the heart of the move higher. Energy names may struggle with the barrel heading lower and having fallen over 20% since the 9 June high – a technical bear market if you will, although this means very little to me. US crude continues to hold the five-day average (see below chart) and as long as this occurs then oil futures traders will push price into $40. Stay short or at least cautious on the energy space for now.

The fact that NASDAQ and S&P futures have caught a modest bid should underpin confidence to some extent today. Amazon and Alphabet (Googl) have produce the goods in their quarterly numbers and both look absolutely fantastic on their respective daily charts.

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