Currency Analyst since 2010

Why everyone awaits the BOJ decision?

USD/JPY presents a difficult market. With the Bank of Japan’s meeting on Friday traders are nervous. The market players hesitate – should they prepare to the increase in Japanese monetary stimulus or should they brace themselves for the disappointment from Japanese central bank?

The fact that on Wednesday Japan's prime minister Shinzo Abe announced 28-trillion-yen fiscal stimulus package increases the pressure on the Bank of Japan to act as well. Earlier the BOJ Governor Kuroda emphasized that that monetary easing and fiscal stimulus are efficient, when used together. Additional monetary easing is likely what Japanese government wants from the central bank. One point of view is that it might be strategically better for BOJ to act on Friday, as the impact of its action will be bigger. According to Bloomberg, 80% of surveyed analysts expect the BOJ to expand stimulus program – that’s a sign of high surety among the experts.

The other point of view is that, on the contrary, measures taken by Japanese government and the fact that USD/JPY is fluctuating in the 105.00 area and not at the critical 100.00 mark, means that the Bank of Japan will decide to save its ammunition for later. Up until now all the enormous sums of money the BOJ injected into Japan’s financial system, failed to lift up inflation and the more money the Bank of Japan print, the more difficult it becomes for it to manage the situation. The lack of action from the regulator will certainly resume USD/JPY downtrend making the bears hunt for now lows. The Bank of Japan is certainty aware of the pressure and of the potential consequences of its inaction – this is why the majority of analysts think that it will expand stimulus tomorrow.

At the same time, even if the BOJ eases policy this month, there’s no guarantee that this will make USD/JPY reverse to the upside and enter a sustainable uptrend. It’s worth remembering that when the Bank of Japan switched to negative interest rates in January, traders sold USD/JPY on the increase. It’s very likely that without increasing expectations of higher US Federal Reserve’s rates medium-term USD/JPY longs will come to no good.  

The expectations of the Fed’s rate hike revived in the past 2 weeks after taking a big blow on Brexit vote, and the reaction to this week’s FOMC meeting was buy-the-rumor-sell the fact: US dollar index opened with a gap down. The market realized that the Fed won’t be in a hurry to raise rates. This mood isn’t permanent – it may change with the incoming US economic data. In fact, the first important data release will be on Friday: America will publish the first estimate of Q2 GDP. Next week we’ll find out the amount of July nonfarm payrolls.

To sum up, trading should be extremely volatile on Friday, so take this into account while making trading decisions. The market will be affected not only by the meeting result, but also by Kuroda’s press conference. The fall of USD/JPY if the BOJ disappoints will be much bigger than its increase if the BOJ increases monetary stimulus. We will have a Sell Stop below 103.50 targeting 100.00. If USD/JPY moves up from the current levels, we’ll be cautious: if it will be the true beginning of a new trend, there will be no need to hurry. 

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