Breaking News
Investing Pro 0
New Year’s SALE: Up to 40% OFF InvestingPro+ CLAIM OFFER

Will BoJ Crush The Yen?

By Kathy LienCurrenciesJan 28, 2016 03:52PM ET
www.investing.com/analysis/will-boj-crush-the-yen-382179
Will BoJ Crush The Yen?
By Kathy Lien   |  Jan 28, 2016 03:52PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
EUR/USD
-0.18%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
GBP/USD
-0.06%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/JPY
-0.27%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
AUD/USD
-0.08%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
USD/CAD
-0.07%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 
NZD/USD
+0.08%
Add to/Remove from Watchlist
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

There’s nothing more important to currency, equity and commodity investors right now than the outlook for oil. At the start of Thursday's North American trading session, Russia dangled the prospect of a production cut when it said Saudi Arabia proposed that each country cut production by 5%. The Energy Minister even told reporters that there were plans for a meeting between OPEC and non-OPEC countries. Shortly thereafter a senior Gulf OPEC delegate was quoted as saying that “the door is always open” for a deal. The headlines sent oil sharply higher with WTI Crude coming within 20 cents of $35 a barrel. Currencies and equities rallied in response, with USD/CAD falling below 1.40. However later in the day, OPEC delegates denied any plans for a meeting with Russia and said Saudi Arabia did not propose a 5% production cut. Oil prices erased their earlier gain and the Dow turned lower after trading up 175 points intraday.

Yet neither oil nor U.S. equities ended the day in negative territory because these conflicting headlines tell us one thing -- that many oil producers are uncomfortable with crude at $30 a barrel. Most currencies also held onto their gains because this nervousness confirms the view that oil bottomed on January 20 -- at $27.56 a barrel. While it remains to be seen whether OPEC nations will agree to production cuts, investors should anticipate more moaning and groaning if oil makes another move down to $30 a barrel. USD/CAD is the most sensitive to oil's wild swings, but every major currency is affected with oil rallies driving risk appetite higher and oil declines causing risk aversion.

Speaking of risk appetite, Thursday night's Bank of Japan’s monetary policy decision should help set the tone. If the BoJ eases, not only will USD/JPY rocket higher, but global equities will also rise in approval. However BoJ easing could actually drive other major currencies lower. On October 31, 2014, the BoJ surprised the market by increasing stimulus and as USD/JPY jumped more than 300 pips in response. One month later it was trading nearly 1000 pips higher than its pre-expansion levels. On that same day, EUR/USD dropped 100 pips, GBP/USD and NZD/USD fell 60 while AUD/USD shed 50. So even though BoJ easing is positive for risk appetite, it may not be positive for risk currencies -- outside of USD/JPY. If the BoJ leaves monetary policy unchanged, how the yen behaves will be determined by whether they signal plans to ease later or attempt to further jawbone on the Yen.

Ahead of it's decision, There were many reasons for the Bank of Japan to increase stimulus, even though it resisted doing so last year. Since the December meeting, we have seen the yen strengthen, inflation ease, retail sales fall, joblessness rise, industrial production decline and exports fall by the largest amount in 3 years. So while the trade deficit turned to surplus in December, manufacturing activity increased according to PMI and consumers grew more optimistic according to the Eco Watchers survey. However with the decline in commodity prices, China slowing and the see-saw moves in stocks that saw the Nikkei fall 10%, Japanese policymakers have a lot more to be worried about now than in December. Also, according to the CFTC’s latest report, last week saw the biggest yen buying spree by speculators since February 2012. The Bank of Japan is notorious for its attempts to “get the best bang for its yen” by intervening or, in this case, easing when speculators are long. With all of this in mind, most economists were not looking for the BoJ to ease because the Nikkei and oil are off their lows and the potential for a bottom could encourage policymakers to wait.

The U.S. dollar traded lower against all of the major currencies Thursday with the exception of the Japanese yen. Thursday’s economic reports had very little impact on the dollar with jobless claims declining, pending home sales growth rising far less than anticipated and durable goods orders falling sharply. The next 24 hours will be interesting with the Bank of Japan monetary policy announcement and fourth quarter U.S. GDP numbers scheduled for release. We all know that U.S. growth slowed at the end of the year, so much so that it was acknowledged in the FOMC statement. If the BoJ eases and GDP surprises to the downside, the largest impact of GDP will be on the other major currency pairs and not USD/JPY.


Sterling traded sharply higher against all of the major currencies Thursday on the back of the fourth quarter GDP report.
The U.K. economy expanded by 0.5% in the last 3 months of the year up from 0.4%. On an annualized basis, the numbers look less rosy with U.K. GDP growth slowing to 1.9% from 2.1%. But given the recent trend of data, investors were bracing for an even weaker report. Thursday’s rally in the British pound amounts to nothing more than a short squeeze because at the end of the day, the U.K. economy is underperforming and the Bank of England is in no position to raise interest rates.

The euro also appreciated against the greenback despite softer confidence numbers and a sharp decline in consumer prices in Germany. The fact that EUR/USD is rising in the face of softer data indicates that like sterling, its move is also driven by short covering.

Will BoJ Crush The Yen?
 

Related Articles

Will BoJ Crush The Yen?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.
  • Any comment you publish, together with your investing.com profile, will be public on investing.com and may be indexed and available through third party search engines, such as Google.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email