Strangely enough, hope has recently become a driver in global financial markets. Hope based on OPEC ministers’ loose words. Hope based on central bankers’ loose comments. Hope based on market hopes. Still, ultimately financial markets progress on technical grounds and, more than anything, they are moved by fundamentals.
When it comes to the BOJ meeting of this week, this is definitely a very important point to make. It must be said that the Bank of Japan is the most aggressive and unpredictable of all central banks. Very recently, the BOJ decided to take Japan into the world of negative rates, surprising the market with this decision, after initially saying that it was not considering that possibility. The truth is that, more than considering it, it went ahead with negative interest rates, shocking financial markets around the globe. But the forex market only bought it for a short while – the JPY temporarily crashed against the USD, only to later make a recovery that no one could really understand.
Now, the market is expecting the BOJ to leave its rates unchanged in the negative territory – without taking them further down. This, oddly enough, is hawkish simply because the central bank is not expected to repeat Draghi’s steps. This is causing the USD/JPY currency pair to stand pat and see what will be announced. On the other hand, Gold is seeing a correction in its rally, because it is facing the announcements of two important central banks’ meetings this week: of the BOJ and of the Federal Reserve.
Ridge Capital Markets believes that, while a hawkish BOJ is being expected, the permanent deflationary threat that Japan is quite likely to drive the BOJ into easing even more and even further down. Plus, after the ECB’s recent bold move into the depths of negative rates, in these currency wars that the world is seeing, it is reasonable to believe that the BOJ will expand its monetary policy again. While this is not the conventional hope currently at play, we believe it is a very reasonable expectation.
That being the case, one would think that going long on gold and short on JPY could be a very good move. Still, it must be remembered that the yen recovered from its sharp losses when the first negative interest rate decision was announced – and that gold is likely to be influenced by this week’s Fed decision and by the USD performance resulting from a probable hawkish Federal Reserve tone.
Having said that, it would seem that building a long USD and short JPY position would be safer and a more likely way to make a profit on the forex markets, given that the USD may outperform the JPY in case of a Federal Reserve hawkish announcement, even if the BOJ comes out with a hawkish decision – being sure that it would gain strongly against the JPY, if the BOJ were to lower its rates even more.
Be as it may, this is a week in which many future market moves will be decided – so trade accordingly and focus on preserving capital through conservative trades that make a solid profit, however small it may be. There are weeks in which it is better to bet on short gains than to take strong risks for large losses. This is one of those.