Yen Seesaw on BOJ Policy Move Warns of Risks in Thin Liquidity

Talking Points:

• Most Major Currencies Treading Water as Post-FOMC Volatility Subsides
• Yen Gripped by Dramatic Seesaw Volatility as BOJ Amends Stimulus Plan
• Thin Liquidity Conditions Boost Headline Risk into End of Trading Week

Gauge Trends and Spot Reversals in the Major Currencies with DailyFX SSI

The major currencies mostly settled into consolidation mode in overnight trade as markets digested volatility following the FOMC rate hike earlier in the week. The Japanese Yen briefly dropped to a two-week low following the BOJ monetary policy announcement, but the move was swiftly erased.

The initial spike followed reports that the central bank is introducing a new asset-purchase facility targeting ETFs. The near-immediate reversal that followed appeared to reflect markets’ realization that the annual monetary base expansion target was left unchanged at 80 trillion yen, meaning the overall size of stimulus was left unchanged.

The new effort to purchase 3 trillion yen per year in ETFs represents an internal readjustment of the types of assets the BOJ will look to buy. Policymakers will also look to buy 90 billion yen in J-REITs and extend the maturity of their JGB holdings to 7-12 years.

A number of minor changes to existing measures were also made. The BOJ will expand eligible collateral for its lending efforts as well as broaden the scope of areas where funding may be offered. Procedures for assessing eligibility for BOJ credit will also be simplified and application deadlines extended.

Looking ahead, the absence of high-profile event risk is likely to make for quiet trading conditions in the final hours of the trading week. Sudden bursts of volatility remain an acute risk however. Indeed, thin liquidity into the year-end probably made post-BOJ price action far more violent than it could have been in more normal markets.

Asia Session

European Session

Critical Levels

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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