The BoJ largely announced what was expected – notably, a move to a 2% inflation target, but it also announced an open-ended asset purchase plan that took a page from the US Federal Reserve's playbook and caught the market by surprise -- at first to the negative side for the JPY -- but then traders managed to read the fine print, which showed that the asset purchases will not begin in this fashion until January of next year. Some are speculating that this clause was added to prevent a negative surprise to the market after so much expectation had built ahead of this meeting.
The amounts of the open-ended plan look enormous if we read the headlines – ¥13 trillion per month (over 140 billion USD), but these include rolling short term debt, so new purchases will be far smaller -- with a current target of expanding 2014 purchases by “only” ¥10 trillion. This is rather small relative to what the bank has announced for expected purchases for this year, so this is hardly the rocket fuel that JPY bears would have liked to see.
JPY Crosses From Here
Hard to judge the potential reaction in the immediate wake of a meeting like this, but I don’t see how this really alters the short to medium term expectations for BoJ action relative to what was baked into the cake going into last night’s meeting. We’ve got the end of the Japanese financial year coming up and the unknown of the new BoJ leadership to sit with for several weeks, so I would suspect that the side of least resistance in the near term is lower for now.
USD/JPY
Yesterday, I mentioned the triple divergence in the USD/JPY pair. This is the third time this year we are seeing a steep two-day sell-off. If this one extends much further, it will be the most significant technical break in the pair’s incredible run since last October/early November. If the 88.90 area Tenkan line currently under pressure gives way, the next area of interest could be down at the sub-87 Kijun line currently around 86.75. Note that it was the Kijun line that held the last real bout of USD/JPY consolidation back in late October/early November last year. I would expect that the cloud eventually catches up with the price action as well in the weeks ahead, making the technicals a bit more dynamic.
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Looking Ahead
Today we have an “EcoFin” meeting of the 27 EU finance ministers. Spreads have crept a bit wider to Spanish debt, but not enough to garner any attention so far. 1.3400 is the upside resistance in EURUSD – which will have a hard time falling unless the JPY eases off its bout of consolidation to the strong side as the EURJPY cross has been a key player due to the divergent developments in Japan vs. reduction of tail risk in Europe. That hasn’t barred the way for EURGBP, however, as we’ve seen new highs there this morning. In a world of reduced EU tail risk and selling of money printers, the UK loses out miserably.
We also have the ZEW survey for Germany up at 1000 GMT. This survey often leads the DAX equity index, and it is interesting to note s degree of divergence as the DAX charges to new highs with the ZEW only reluctantly dragging higher to a lower peak than previous peaks – just another sign of asset markets outstripping fundamentals and even sentiment.
In the US, we have Existing Home Sales, which are poking at five year highs (there was a tax-benefit relate spike in late 2009 that has not yet been surpassed) and we are approaching the turnover of the time frame around the year 2000, which averaged above 5 million units at an annualized rate.
Upcoming Economic Calendar Highlights
- Euro Zone Jan. ZEW Survey (1000)
- UK Jan. CBI Trends and Business Optimism surveys (1100)
- Canada Nov. Retail Sales (1330)
- US Dec. Chicago Fed National Activity Index (1330)
- US Jan. Richmond Fed Manufacturing Index (!500)
- US Dec. Existing Home Sales (1500)
- UK BoE’s King to Speak (1945)
- Australia Q4 Consumer Prices (0030)
- Japan BoJ Monthly Economic Report (0500)