Yesterday, Japanese Prime Minister Shinzo Abe announced an additional fiscal package worth JPY 430.8 billion. This is in addition to the fiscal actions already taken by the administration. It is estimated Japan will need JPY 10 trillion to JPY 20 trillion to fight the coronavirus. On the other hand, the Bank of Japan has been speaking endlessly about the numerous tools it has to provide more stimulus into the economy. They also have been talking about how they are “monitoring fx movements.”
In the old days, the BoJ would intervene in the fx markets and run USD/JPY up two big figures to take pressure off the rising yen. However, traders began to catch on to this trick, and would begin selling yen pairs as soon as the BoJ was done buying. In a few days, USD/JPY would be lower than where it was when the BoJ started selling yen.
Today BoJ members just talk. For most central banks, speaking can be a powerful tool to guide the markets as to where monetary policy may be headed next. Not in Japan.
The BoJ is set to meet next week at its regularly scheduled interest rate meeting. Earlier today, it issued a statement saying it is “likely to ease monetary policy next week to prevent market volatility from affecting business sentiment; more ETF buying seen as among the likely options,” sources say. This is equivalent to pouring a glass of water into the ocean. It really doesn’t matter what the BoJ says or does, the trading community has little faith in it.
The Japanese yen has always been considered a “flight to safety.” Why? Because markets have become aware that the BoJ is always there to bail them in, in the worst case scenario. (I must mention here that the U.S. Federal Reserve and the European Central Bank don’t seem too far behind over the last 10 years).
In the 15-minute bar, when the BoJ “talk” was released on the wires, USD/JPY briefly traded from 104.70 to 105.00. Sellers took advantage of the bounce to sell. And the bar closed at 104.57. About 30 minutes later, the price was 20 pips lower, near 104.37.
Astute traders who want to try to find direction for the USD/JPY will watch the U.S. 10-Year Yields. Notice the correlation coefficient at the bottom of the chart. The correlation coefficient is +0.85. A correlation of +1.00 means that the two instruments more perfectly with each other on a 1 to 1 basis. A +0.85 means that 85% of the time they move together.
USD/JPY has been in a down trend since mid-February. Yesterday, it filled that gap from over the weekend. In doing so, price has created a rising wedge and is currently moving outside the wedge. Initial resistance is the bottom line of the wedge near 105.30. Resistance above there is the downward sloping trendline from mid-February near 106.70. (There is horizontal resistance there as well. Horizontal support comes across at the top of the hammer bottom near 102.60, and again at Sunday night’s (Monday’s trading session) lows near 101.18.
Although the BoJ is ready to provide more stimulus at its next meeting, it’s not likely to have much of an affect on the yen. A “whatever it takes” comment will probably not even help. Watching the U.S. 10-year yield will help give traders a better sense of where USD/JPY is headed next.