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The Bank of Japan, in a surprise move, has decided to trim the amount of long-ended bond purchases and effectively begins its tapering operation. The move comes as a surprise due to the fact the bank made no indication of such a move at the last policy meeting just a few weeks ago, and the fact that Japanese data does not support the idea of sustainable growth within the nation.

The bond purchases began in mid-2016 as part of the banks yeild-curve-control-policy and have been adjusted several times in the past. The bank says the move is to maintain their forward yield curve outlook but traders say the wind-down of stimulus activities has begun. The yen, not surprisingly, surged on the news but some analysts, this one included, think the move in the yen is a knee-jerk reaction to news and one that will quickly reverse.

Looking forward the FOMC is, without a doubt, on a path of policy tightening and expected to raise rates 2-4 times this year. The BOJ is not on the same path; they may have adjusted the amount of bond purchases but have done nothing to stop the flow of new money into the system. The USD/JPY fell hard on the news and created a long red candle breaking below the moving average. This moves does look bearish with the caveat support is just below today’s lows at 111.000.

The indicators are consistent with a test to support in the near term, but are also consistent with range bound trading in the longer term and indicative today’s move may not be as decisive as it looks. A break below 111.00 would be bearish, a bounce would confirm the range. There is not much data from Japan this week but CPI and PPI data from the US on Thursday and Friday are likely catalysts.

USD/JPY graph

The EUR/JPY continued to move lower as the BOJ move compounds euro weakness sparked by Monday’s consumer inflation data. The data was weaker than expected, reduced expectation the ECB would tighten and weakened the euro while the BOJ decision lent strength to the yen. The pair extended its drop from resistance, broke through the short term moving average and looks like it is heading down to test the 1.3200 level. The indicators are both bearish, confirm today’s drop and indicate lower prices to come.

EUR/JPY graph

The euro was able to gain versus the dollar but that move is a technical bounce from support. Traders short the euro used the moving average as target for profit taking and that decision has the pair moving higher. Today’s gains created a medium sized green candle that moved up to test resistance at the 1.2000 level. Early indications are that resistance is present, capping gains.

euro was able to gain versus the dollar but that move is a technical bounce from support

The indicators remain bearish and pointing lower, consistent with a move lower within the range, with support target near 1.1900. A break above 1.2000 may be bullish, a break below 1.1900 may be bearish but either move will leave the pair range bound in the short to long term. Look to tomorrow’s PPI and Friday’s CPI to move this pair one way or the other.

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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future


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