Decision Day: BoJ Scenarios

October 30, 2015

BoJ Decision Day:
The most recent Bank of Japan decision was to leave current levels of stimulus unchanged. But as we spoke about last time, Kuroda’s quotes around keeping course with steady levels of stimulus to achieve their 2% inflation target didn’t really line up with the fundamental state of the Japanese economy.

This leads nicely into today’s BOJ decision on Monetary Policy and accompanying outlook report, where a change is now very much in play. Bloomberg surveyed economists are very much divided on whether Kuroda and the BoJ will expand its asset-purchase program to further record levels, putting the decision and Japanese Yen pairs in play for the day.

“Sixteen of 36 analysts surveyed by Bloomberg said they expect additional easing, eight forecast more stimulus at a later date and 12 see no prospect of a policy change in the foreseeable future.”

With the BoJ currently targeting an annual expansion of ¥80 trillion via the purchase of Japanese government bonds, easing would see the pace of asset purchases ramped up to an annual pace of ¥100 trillion Yen.

Remember that exchange-traded funds and real estate investment trusts are also at their disposal and Kuroda has spoken in the past about having more than one option available to the BoJ when it comes to policy tools. If they do decide to ease, the government bonds headline number will be the initial spike, but the market will dig deeper as the fallout settles.

BoJ Scenarios Overview:
If the BOJ ease (announce more stimulus) – USDJPY bullish.

If the BOJ stay the course (no changes announced with dovish projections) – USDJPY bearish.

USD/JPY Daily:
uj10
Click on chart to see a larger view.

This USD/JPY chart was featured as yesterday’s chart of the day in the Fed Chop & Change post but with market expectations split down the middle, it is worth including again here.

Price is close to range resistance but the most tantalising fundamental scenario for me is a hold, accompanied by anything dovish from Kuroda. Keep in mind Thursday’s hawkish FOMC and we could be presented some buying opportunities on spikes down.

What are your thoughts for playing the Bank of Japan? Leave a comment below.

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On the Calendar Friday:
NZD ANZ Business Confidence
JPY Monetary Policy Statement
JPY BOJ Outlook Report
JPY BOJ Press Conference

CAD GDP m/m
USD Employment Cost Index q/q

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Chart of the Day:
Sticking with the BoJ theme, we jump over to the Yen crosses today with a look at the unheralded CAD/JPY pair.

CAD/JPY 4 Hourly:
cj1
Click on chart to see a larger view.

We have clean 4 hour trend line support from which I have then drawn some parallel scenarios away from the market above. Price has bounced off this support level and has now encountered some short term resistance as price flags back towards major support.

The question becomes does today’s Bank of Japan decision become the catalyst for a hold or a breakout. Try to think about it in terms of the USD/JPY scenario above while taking into account the easing to come out of Canada. Whichever decision you make, there are levels to manage your risk around.

Do you see opportunity trading the Bank of Japan Decision?

Dane Williams – @VantageFX

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