Market Brief
The Japanese yen rallied strongly in overnight trading as the BoJ opted for a modest increase in stimulus, disappointing market participants who expected a bolder move. More specifically, investors were expecting the central bank to cut interest rates further into negative territory and to increase the size of its quantitative easing program.
In the end, the BoJ went for an increase in its exchange traded funds purchases of ¥2.7 trillion, up to ¥6 trillion, and expansion of its USD lending program to $24 billion. On the other hand, the policy rate was left unchanged at -0.10% (the market was expecting a cut to -0.15%), while the pace of government bond purchases was maintained.
As discussed yesterday, it was almost impossible for the BoJ to surprise with a bold move as the market started to sense the limit of quantitative easing.
USD/JPY had a volatile session in Tokyo and moved between 102.71 and 105.63 before stabilizing at around 103.55 in early European session. The bias is definitely on the downside in USD/JPY as traders started to buy protection against further yen strength. Indeed, the weekly 25 delta risk reversal measure bounced back into negative territory after the BoJ announcement, indicating that further upside gains in USD/JPY are rather limited.
In Switzerland, the Swiss National Bank posted its bi-annual results as well as its currency allocation for the second quarter. For the first half of 2016 the SNB reported a profit of CHF 21.3 billion that stems from a valuation gain of CHF 7.6 billion on gold holdings and CHF 13 billion profit on foreign currency positions.
After falling 0.70% on Thursday, EUR/CHF consolidated at around 1.0855. The Swiss franc continued to rally verse the greenback as USD/CHF tested 0.9771 in Tokyo.
The pound sterling was the second best performer in Asia as it rose 0.21% verse the US dollar. However since mid-July, GBP/USD has been trading in a very tight range as investors have been struggling to get better visibility on the UK’s outlook after the Brexit vote. In the short-term, the pair is trading with a slight positive bias but will likely find a strong resistance at around 1.33 (top of its monthly range).
Next week’s BoE meeting could be a game changer for the pound as additional easing could send the pound south. However, so far, the BoE adopted a cautious approach with regards to a potential increase in monetary stimulus as the available data did not suggest a substantial deterioration of the UK economy since the July meeting. We anticipate the BoE will wait to get better clarity before stepping in.
Today traders will be watching unemployment rate from Denmark, the euro zone and Norway; trade balance from Turkey; inflation report from Spain, Italy and the euro zone; GDP from Sweden, Spain, Canada and the US; core PCE, Michigan index, personal consumption and Chicago purchasing manager index from the US.
Currency Technicals
EUR/USD
R 2: 1.1428
R 1: 1.1186
CURRENT: 1.1098
S 1: 1.0913
S 2: 1.0822
GBP/USD
R 2: 1.3981
R 1: 1.3534
CURRENT: 1.3195
S 1: 1.2851
S 2: 1.2798
USD/JPY
R 2: 109.14
R 1: 107.90
CURRENT: 103.30
S 1: 99.02
S 2: 96.57
USD/CHF
R 2: 1.0328
R 1: 0.9956
CURRENT: 0.9776
S 1: 0.9764
S 2: 0.9685