After rebounding early last week, the Japanese Yen fell again on Friday. Virtually all analysts and media outlets blame the coming policy meeting of the Bank of Japan for this latest development. There is talk about “high expectations” and “decisive actions”. It is all great, but what exactly are those expectations? In all likelihood, the central bank would have to agree with what the new government has been suggesting for the past several weeks and take appropriate steps in that direction.
For example, the BoJ should raise the inflation target from 1% to 2%, something the Prime Minister Abe has been asking for, even demanding. We should recall that he threatened the law that guarantees independence of the central bank in case of lack of new serious easing measures. In addition, some suggest the BoJ will massively expand its asset purchase program. Under this theory, the central bank will no longer announce the specific amount of purchases. Instead, we could see an unlimited easing operation, perhaps lasting until the 2% inflation target is reached. Another possible step is to add long-term government bonds to the shopping list. To date, the Bank of Japan has only been purchasing notes with maturity of two years or shorter. One could assume that these high expectations are priced in the JPY, although but who knows? One thing is clear – the Yen pairs are likely to remain volatile this week, especially following the announcement.
Until the meeting concludes, I see no point in trading the Yen outside of very short time frames. Do not want to be in transaction during the announcement. With this in mind, for now I will focus on other currency pairs. The New Zealand Dollar, for example, lost about 100 pips on inflation data and that could be a sign of further weakness. On the 4H chart, the NZD-USD formed a new support at 0.8325. If this obstacle is broken, I want to go short at 0.8320, targeting about 80 pips.
Another commodity currency coming under pressure is the Australian Dollar. Its pair with the Swiss Franc, had been consolidating for a few days, followed by couple of failed breakouts on either side of the range. During this process, the price found support at 0.9760, below the 100 SMA. While the AUD-CHF is now back inside the consolidation zone, typical behavior in Forex trading, a test of this new support could initiate a larger downside push. In this case, a sell at 0.9755 makes sense to me, seeking 70-80 pips. As for the opening itself, gaps are always possible, potentially creating trading opportunities. Have a great trading week!
Mike K.