Today’s BoJ meeting revealed little new to traders, although despite speculative positioning increasing their short holdings, price action suggests near-term strength for the Yen.
Whilst BoJ members unanimously agreed policy was to remain easy, they were less congruent on how much information should be provided for a QE winddown due to fears of market turbulence. The key take home here is we can expect policy to remain unchanged for quite some time and forward guidance for a balance sheet reduction may not be their style, as it is with ECB and the Fed.
Summary of the BoJ Minutes
Many members agreed:
- Need to keep policy easy because 2% inflation target is still distant
Several members said:
- Providing information on exit could cause market turbulence
- Companies are taking steps to absorb upward pressure on wages
- Important to continue internal analysis on possible exit strategies and impact
A few members said:
- Important to explain how exit will impact BoJ’s finances
One member said (not necessarily the same member for each comment):
- 2% inflation target is a global standard and can contribute to FX stability
- 2% inflation target allows for less freedom and should be more flexible
Tomorrow, Japan releases retail sales, employment and inflation data. With low hopes of inflation returning (and BoJ once again lowering and delaying their return to target) it is the employment sector we are most interested in. Overall data remains solid but every turn for the worst must start somewhere, which may have been signalled by unemployment rising above its 12-month average. At 3.1% unemployment remains very low but the 0.3-point rise is large by historical standards, and the move above or below the 12-month MA has been associated with major turning points.
Throughout 2007, unemployment meandered around the 1yr MA before finally rising, but indeed it did rise once it got started. The relationship between unemployment and job/applicants is inverted yet there is no clear relationship between which one turns first. But if we are to see unemployment rise form here we would expect job/applications to move lower over the coming months. This will only undermine reflationary efforts even further.
USDJPY found grounding above 110.63 support but whilst we remain below 112.42 the trend is technically bearish. This allows a lot of headroom for upside spikes to consider fading into any rallies around the Fed meeting although for the near-term traders are likely to take notice of the bearish channel. The tight channel also has the monthly and weekly pivot to reaffirm resistance upon a bullish attempt to breakout which leaves USDJPY vulnerable to another leg lower. A break of the 110.63 low assumes a run towards 109.83 where the monthly S1 and weekly S2 provide a tight zone of resistance.
The Fed meeting is a calendar highlight for trades, yet an event which may not provide much more than we already know. Traders are pricing in a 47% chance of a hike in December which brings the 3rd hike this year into question. Data since June has not warranted a hawkish meeting tomorrow, which leaves the remote possibility of balance sheet reduction being mentioned as the potential highlight. It is expected to be the September meeting which provides such information, yet perhaps they’ll surprise markets with some details at this year’s Jackson Hole symposium on 31st July.
AUDJPY has stabilised below Y82 as it finds resistance at the weekly pivot. A break above this level assumes a bullish resumption although we also warn that the RSI is sending bearish signals for the near-term and we also remain a little extended from the bullish trendline. The bearish divergence which formed prior to the top has been confirmed but the index also broke its own bullish trendline to warn of a change in sentiment at the highs. As RSI has not yet tested 30 and AUDJPY remains elevated, we see downside potential.
For now, however, we prefer to step aside until a clearer picture emerges as the reward / risk potential below the weekly pivot and above the bullish trendline is too low. Instead we prefer to await a break above 82 or a bearish break of the trendline. The latter scenario is not an unreasonable one as the daily RSI has now crossed back below 70 twice since the beginning of July and the peaks do not match the momentum seen on price, which is forming a slight divergence.
Despite bearish speculators piling into Yen short futures, prices have gained these past two weeks and the rally on AUD crosses is looking stretched. Guy Debelle could also jawbone AUD once more tomorrow which leaves AUDJPY vulnerable to be knocked off of its perch.
