BOJ and Yields

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Even with potential for a hawkish surprise at BOJ tonight, the path of least resistance for USDJPY may still be up.

by Brent Donnelly

December 18, 2023

Fun Christmas puzzles for kids right here:

https://www.gchq.gov.uk/files/2023%20GCHQ%20Christmas%20Challenge.pdf

Current Views

Long EURCHF @ 0.9444

Stop was 0.9339.

Moved it up to 0.9434.

Take profit 0.9644

December 18, 2023

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BOJ

The Fed pushback dynamic is kind of strange as the market is simply not interested in hearing what Williams, Goolsbee, Mester, and whoever else has to say. Going into Williams, SFRZ4 was 96.16 and now it’s 96.125, showing that the pushback, while understood loud and clear, has not changed market pricing. So, a full-throated attempt by a variety of Fed deputies to challenge market pricing has left market pricing unchanged. Interesting.

One of the final major events on the calendar for 2023 is tonight’s BOJ meeting. There is an extra layer of intrigue as Nippon Steel has agreed to buy US Steel for $14B cash. This means that if the BOJ does nothing tonight, there could be two strong winds blowing up and to the right on the USDJPY chart at the same time.

Dovish BOJ meetings have been good opportunities to buy USDJPY and this one should be the same deal as there is plenty of liquidity in the moments after the policy announcement and you can get in with a fairly tight stop loss (say 70 pips below entry). A dovish BOJ result will mean the 200-day most likely holds as well. That said, most of the dovish BOJ meetings in the past came in a regime of rising US yields and so this is a modestly different setup.

You can see the USDJPY trend has been well defined by 200-day moving averages and we are flirting with the simple 200-day right now (the blue line).

USDJPY vs. 200-day (simple and EMA)

While a rate hike this month would be a clearly hawkish surprise, it’s less clear what the impact will be if they go with no hike, plus a strong signal that they will hike in January. That is the toughest one to trade but will most likely still be viewed as hawkish. The market has been burned over and over by selling USDJPY on YCC band changes, but there are enough people in the market that believe the policy rate change is more important than YCC band widening. So initial reactions should still be meaningful and orthodox.

You can see in this chart from WIRP on Bloomberg that there is a full hike priced by April 2024, and about a 40% chance of a hike in January. A hike tonight is a significant surprise—of 56 economists that have input their forecast for tonight’s meeting into Bloomberg, zero are calling for a rate hike.

Market pricing for BOJ policy path in 2024

Here are my estimates for the market reaction:

While I only have 100 pips higher on no change, I would expect that the path of least resistance in following days would be higher USDJPY as bonds look to have overshot and there is some risk that the fixed income market prices in the reflationary side of this FOMC rate cuts in 2024 message. The Nippon M&A could also matter (RHS).

Calendar

The calendar on Friday had an error: BOJ is tonight.

Final Thoughts

People are starting to wonder if these Red Sea attacks will be inflationary as they push oil up and/or shipping costs higher. Supply chain snarling and higher oil doesn’t sound like a great narrative for continued strength in bonds.

May you successfully decipher the markets today.