The shock and awe of the Swiss National Bank’s actions late last week are still reverberating around the currency world as the fallout from the decision to pull the peg is still being sorted out. The EUR/CHF in particular has appeared to find equilibrium as it has oscillated around parity since Friday. Many have argued that the action by the SNB was in direct relation to their having knowledge of what the European Central Bank will do later this week; namely that the ECB will be introducing Quantitative Easing to the tune of up to one billion euros. Framed in those terms, it makes complete sense for the SNB to abandon their peg and cut rates to -0.75% due to the untold fortune they would have to spend to continue propping up the EUR against their currency. Today, we have another central bank who has taken some action that may have the same type of knowledge that the SNB had: the Danish Central Bank.
The DNB (acronym for Danmarks Nationalbank) already had a deposit rate that was in negative territory at -0.05%, and they lowered it to -0.20% this morning. Is it coincidence that these central banks are acting to dissuade speculators from buying their currencies days before the ECB makes their decision? Logic would seem to dictate that this isn’t a coincidence since central banks infrequently make decisions to change deposit rates or create a type of “black swan” event as has happened. And if the SNB and DNB are in on the information, it wouldn’t be out of the realm of possibility for other central banks to also have the same knowledge. Therefore, looking for central banks that may be making decisions ahead of the ECB this week could provide the greatest opportunity for additional volatility.
One of the central banks making such a decision is the Bank of Japan, providing their statement and press conference late Tuesday/early Wednesday for those of us in North America. The BoJ hasn’t been shy in introducing new policy measures in the past, most recently increasing their QE at the end of October 2014. Would they be so bold to increase it once again if they have knowledge of ECB actions on Thursday of this week? Considering their previous action was only about 80 days ago, I’m skeptical that they would do anything additional until they see the full plan from the ECB and the market’s reaction to it.
Assuming the BoJ does nothing significant, there may be some opportunities arising to see the JPY increase in value, particularly against European currencies. I’m hesitant to jump in to the EUR/JPY fray considering the potential for significant gaps to appear, so I’m leaning more toward the GBP/JPY which may have a similar reaction, but with less extreme volatility. Fortunately, there are a couple of technical levels of resistance that are converging in this pair that may provide an ideal spot for JPY increases to occur.
For the last couple weeks, GBP/JPY has been progressively trending lower, and the recent rise in this pair brings it close to the top of a declining trend line. In addition, there is a Fibonacci based Bearish Gartley Pattern that also completes near that trend line providing additional resistance. If the GBP/JPY can rally to 178.70 by the end of normal North American trade today, the pricing and timing might align for a rejection at those levels as investors position for BoJ inaction.
