The Bank of Japan surprised overnight with a ¥10 trillion expansion to the monetary base target, bringing the target to ¥80 trillion from ¥70 trillion previously. While an eventual move to more expansion seemed especially likely in coming months due to the sharp drop in oil prices, the timing of this move took the vast majority of market observers by surprise.
Before the meeting yesterday, another story that the government pension investment fund (GPIF) would up its allocation to foreign investments to 40 percent from 23 percent was already pressuring the yen ahead of the BoJ meeting. The GPIF holds an estimated $1.2 trillion in assets, so we’re talking about a lot of selling if this flow becomes a reality.
Chart: USDJPY
USDJPY to a new high for the cycle above 110.00, even touching toward the 111.00 area overnight. The next resistance, assuming the news continues to support risk appetite and the US news next week proves supportive, could stretch toward the 112.00 to 112.50 area. 
Source: Bloomberg, Saxo Bank
The German October CPI estimate was lower than expected on the headline, with the month-on-month coming in at -0.3%. But this was written off as no huge surprise at the time of the release given the sharp drop in oil prices in late September and into October. Still, it’s not euro supportive by any means.
Note the gigantic drop in New Zealand building permits overnight (-12.2% month-on-month). The data series is a bit volatile and the market is probably distracted by the risk-on/sell yen trades after the overnight news out of Japan, but this is very negative for the Kiwi if we’re finally beginning to see more downside traction in the housing market.
Looking ahead
With risk very much on, a pattern is developing that we have seen in the past, the USD relatively strong versus the EUR and JPY while it doesn’t rally very sharply versus the G10 smalls or emerging market currencies. Let’s see where we are next week on the other side of the next batch of US data – at present it looks like a bit of a melt-up in sentiment (or particularly nasty bear squeeze, depending on your perspective) with the US S&P 500 future up 25 points from its close yesterday on the GPIF story, for example.
Should we really expect further stability if the market is gapping more than a percent to open near all-time highs on top of one of the most brutal rallies in recent market history? Colour me a bit cautious here, as this market is at risk of losing its marbles with such high volatility.
Today in Europe, watch out for the Eurozone CPI estimates for October, with perhaps more focus on the core reading because of the obvious pressure on the headline inflation from the steep plunge in petrol prices over the last couple of months.
More inflation data up later in early US hours with the September PCE Deflator/Core readings, where the trend in the core has held steady to slightly higher this year near 1.5% after starting the year at 1.3%. A higher than expected reading could see the USD closing the week with a buying flourish.
Canada GDP is also on tap as USDCAD struggles to look interesting, generally appearing supported if we steer clear of the 1.1150 level here tactically.
Be aware that next week will kick off with an early start Monday as China reports its latest PMI data for manufacturing and non-manufacturing and Australia reports housing-related data that could see a reaction.
BoJ's surprise stimulus move caught the market and the yen on the wrong foot. Pic: Digital Vision
Economic Data Highlights
- New Zealand Sep. Building Permits out at -12.2% MoM vs. +1.0% expected
- Japan Sep. Jobless Rate out at 3.6% as expected and vs. 3.5% in Aug.
- Japan Sep. Overall Household Spending fell -5.6% YoY vs. -4.3% expected and vs. -4.7% YoY in Aug.
- Japan Sep. National CPI out at +3.2% YoY and +2.3% ex Fresh Food and Energy, vs. +3.3%/+2.2% expected, respectively and vs. +2.3% YoY in Aug.
- UK Oct. GfK Consumer Confidence out at -2 vs. -1 expected and -1 in Sep.
- Japan Bank of Japan raised the Monetary Base Target to ¥80 trillion from ¥70 trillion vs. no change expected.
Upcoming Economic Calendar Highlights (all times GMT)
- Norway Norges Bank’s Olsen to Speak (0830)
- Norway Oct. Unemployment Rate (0900)
- Norway Norges Bank announces daily FX Purchases (0900)
- Euro Zone Sep. Unemployment Rate (1000)
- Euro Zone Oct. CPI Estimate and CPI Core (1000)
- Canada Aug. GDP (1230)
- US Sep. Personal Income/Spending (1230)
- US Sep. PCE Deflator and PCE Core (1230)
- US Oct. Chicago PMI (1345)
- US Oct. Final University of Michigan Confidence (1355)
- China Oct. Manufacturing PMI (Sat 0100)
- Australia Oct. AiG Performance of Manufacturing Index (Sun 2230)
- Australia Oct. RPData/Rismark House Price Index (Sun 2300)
- Australia Sep. Building Approvals (Mon 0030)
- China Oct. Non-manufacturing PMI (Mon 0100)
- China Oct. Final HSBC Manufacturing PMI (Mon 0145)