Market Overview
True to its word, the Bank of Japan has made a comprehensive review of its monetary policy, and the market seems to be giving the BoJ a tentative thumbs up. Perhaps more of a reaction will be seen after this evening’s FOMC decision is out of the way, but the initial reaction to the BoJ has been for the yen to weaken, the Japanese government bond yield curve to steepen and Japanese equities to push higher.
This comes after the decision to control the yield curve would be its focus. The BoJ abandoned its maturity range for JGB purchases, will target a yield of zero for the 10-year bond, and abandon its target to increase the monetary base by 80 trillion yen per year, suggesting that the 2% inflation target is no longer restrictive, effectively meaning looser for longer.
Importantly, it also kept the deposit rate at -0.1% (to the relief of the banks). It seems as though these measures should be weaker for the yen. However, perhaps it is a bit early to celebrate as now the market will look forward to tonight’s Fed decision.
The Fed is not expected to hike rates this evening, however there is an expectation for a “hawkish hold” where the FOMC points decisively towards a December hike. I think that any shirking from this will see the dollar sold off. The dollar has been gradually strengthening in the past couple of weeks and the early move this morning in the wake of the BoJ has been to continue this move. This is seen on the trade-weighted dollar index which has pushed higher, whilst yields are also higher.
Wall Street closed all but flat for a second consecutive session last night, but the Asian markets have been supported by the BoJ. European markets are cautiously higher too, but are likely to be restrained by uncertainty in front of the Fed tonight.
Forex markets show the dollar is stronger across the forex majors, however commodities have been supported by the accommodative BoJ decision with gold and silver mildly higher. Oil is also up over 2% today, helped by an inventory drawdown surprise from the American Petroleum Institute oil inventories.
The EIA crude oil inventories are at 1530BST (+3.0m barrels expected). The FOMC monetary policy statement is at 1900BST with Janet Yellen’s press conference at 1930BST. The Reserve Bank of New Zealand is also announcing monetary policy at 2200BST but is not expected to move on rates from+2.0%
Chart of the Day – GBP/AUD
Just a few days ago it seemed as though sterling was on the brink of rallying to such an extent that there would be a break above 1.7785. However, the resistance held and the subsequent decline has flipped the improving outlook on its head to break below a key reaction low at 1.7205 to confirm a small top pattern, which implies a target range of 1.6850 but could be a retest of the key low at 1.6715.
The bulls will certainly be concerned by the momentum indicators with the Stochastics dropping sharply, the RSI below 40 with downside potential and the MACD lines giving a bear cross sell signal. The intraday hourly chart shows that the initial band of resistance comes in between 1.7250/1.7300 with a key pivotal resistance coming in around 1.7400, and rallies will be seen as a chance to sell today. The hourly RSI is now consistently failing between 45/50 and is showing how the sellers are returning quickly now.
The euro had already posted a fairly negative candle yesterday as the pair drifted lower throughout the afternoon to close around the low of the day, however, ahead of the Fed the euro is falling. This fall is being exacerbated by the mild dollar strength in the wake of the BoJ, but the key August low at $1.1120 is coming under pressure this morning. I still do not expect an significant breakdown of this support, but there is certainly a negative bias that is taking hold.
There have now been three negative candles completed in the last four sessions and the RSI is dropping away whilst the Stochastics are also falling. It seems as though the bears are straining to take control but are still likely to just hold off from taking a significant view ahead of the FOMC tonight. The hourly chart shows the near term ceiling around $1.1200 which was the previous near term breakdown. A move below the long term pivot range $1.1050/$1.1100 would change the outlook and open a new downward phase for the pair.
Cable has been in a medium term range between $1.2796/$1.2535 since settling down post-Brexit. However, the drop below the $1.3060 pivot within that range has turned the outlook more for a negative bias. This pivot has also become a basis of resistance now in the past two sessions and the momentum indicators are increasingly corrective with the RSI below 40, the Stochastics negatively configured and the MACD lines crossing lower.
The hourly chart shows rallies being sold into as the hourly RSI now fails around 50 and MACD lines sustain below neutral. The move back below $1.3000 leaves the market open now to testing the next support at $1.2863 and the range low at $1.2796 is increasingly possible. The FOMC tonight is likely to be the next phase of direction for the pair, but ahead of the decision the outlook suggests the bears are looking to pull the market lower.
Dollar/yen was always going to be the big mover early this morning in the wake of the BoJ decision just a few hours ago. The daily chart finally shows that we may now be set for some direction. Already volatility has picked up significantly with the daily range (so far) of around 170 pips, the largest in over two weeks. The consolidation may now be set to end.
Although there was a brief dip below the September low at 101.18 in the volatility post the BoJ, the initial reaction seems to be bullish for the pair (i.e. weakening the yen). As yet it would be best to monitor the outlook, considering the Federal Reserve announces this evening and could change the outlook again.
Look for a closing break above 103.35, which has been the consolidation high for the past couple of weeks. A move above here would suggest the bulls are making real ground as it would also break the long-term downtrend. The intraday hourly chart has shown a push above 102.00, and this has been a pivot line over the recent consolidation and should also become supportive.
There is still a long way to go on “Super Wednesday” and volatility could mean further swings, but the initial reaction is positive for dollar/yen.
Traders are processing the BoJ and have still got the FOMC to look forward to tonight. The technicals on the gold chart remain on the limit with the longer-term bullish arguments still hanging on, but only just. The uptrend since December, the support above $1300 and the 89 day moving average (currently $1310) are all being tested. The daily momentum indicators are not pointing to an imminent breakdown, whilst the chart reflects an uncertainty the could be resolved this evening.
The last three candlesticks on the daily chart show very small bodies (lack of indecision from traders) but holding the support above $1300 is important. Reaction to the BoJ this morning has been increased volatility but a continued uncertainty. The hourly chart shows the resistance overhead between the two pivot lines of $1325/$1330 is key, whilst the lows of the past few weeks come in at $1306.20 and $1301.90. There is little direction showing on the hourly momentum indicators. A hawkish Fed tonight would put the supports under pressure.
The oil price has picked up in the wake of an unexpected inventory drawdown in the API stocks, whilst the contract roll over of the October front month expiry has also pulled the price higher. This means that the negative trend of the past few weeks has now been confirmed to be broken, whilst there has also been a push above the resistance at $44.15/$44.75.
The bulls will now look to confirm this improvement in WTI overnight and consolidate the move. There is still a big volatility factor today with the EIA inventories and the FOMC meeting tonight. The resistance is now at $45.75 before the important pivot at $46.50. The hourly chart shows an immediate support band today at $44.15/$44.35.
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