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Beware the BoJ as the Fed Looks to Avoid a September Repeat

Beware the BoJ as the Fed Looks to Avoid a September Repeat

2016-09-19 13:15:00
James Stanley, Strategist

Talking Points:

- This is one of those Central Bank weeks, and Wednesday is going to be loaded: On Wednesday morning we hear from the Bank of Japan. Later in the day we hear from the Fed, and just after that we hear from the RBNZ. Each of these meetings can bring new information to markets that can drive risk trends for weeks or perhaps even months after.

- While the Fed is largely expected to pose a hawkish-hold scenario similar to what was seen last September, expectations are significantly more opaque around the Bank of Japan. While the BoJ is stretching the limits of current QE-policies, the bank has said that they’re going to release a ‘comprehensive review’ of their monetary policies, and this could stoke future expectations around even more easing in new and inventive ways.

- If you’re looking for trading ideas, check out our Trading Guides. And if you want something more short-term in nature, check out our SSI indicator. If you’re looking for an even shorter-term indicator, check out our recently-unveiled GSI indicator.

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For weeks global markets have been looking ahead to the upcoming Central Bank meetings out of Japan and the United States, both lining up for Wednesday of this week. And while hopes are running high for more loosening out of Japan, markets are on edge around the fear of a faster-than-expected interest rate hike out of the Federal Reserve. To be sure, few are actually expecting a hike out of the Fed on Wednesday; but, the timing of when they’re planning to pose that next move could be critical for risk trends in the weeks and months ahead. And not to be forgotten, the Reserve Bank of New Zealand has an interest rate decision later on that same day, and markets are looking for another cut out of the RBNZ in the next couple of months. We previewed that meeting in the weekly trading forecast, and if you’d like to read more, please click here.

So we’re likely looking at heavy volatility towards the middle of the week as markets incorporate all of this new information. Below, we look at two of the more widely-followed markets that are primed to move around these upcoming announcements.


This is an obvious candidate for volatility given that both represented Central Banks are speaking to markets, and this is really an extension of similar themes seen in the pair over the past four years. It was about four years ago that Abenomics took Japan (and the economic world) by storm, and this led to considerable Yen weakness in the three years following. For currency traders this was a beautiful thing, as a clean and consistent trend developed in Yen-pairs that made trading the move fairly simple; wait for the Yen to strengthen and then sell some more; the BoJ was behind the trade and it seemed like the rest of the world was going along with it.

But it was about a year ago that this theme came to an abrupt end: We had called the Yen the ‘safe haven vehicle of choice’ as volatility from China began to emanate around-the-globe, and since then the currency has strengthened by more than 18% against the US Dollar, erasing pretty much the entire move of the year prior. This has produced a fairly clean trend-channel in USD/JPY, and expectations for even more stimulus out of Japan have raged as the Yen has spent the past three months attempting to develop long-term support around the ¥100.00-handle.

At issue is whether the BoJ is running out of ammunition. The bank already owns over 38% of their own government bond market, and many are of the mind that they’re running out of tools to employ in the effort of stoking inflation. This hasn’t been helped by the fact that for the past few meetings, markets have went into BoJ meetings expecting something only to be disappointed. So that hope appears to be waning. Just two months ago expectations were ramped-up for an announcement around the highly-theoretical ‘helicopter money.’ As we said at the time, any announcements of BoJ stimulus would likely come later in the year, as Prime Minster Shinzo Abe had previously said that a ‘comprehensive, bold economic package’ was coming this fall. Thickening the drama is the fact that the Bank of Japan has announced that they will issue a ‘comprehensive review’ of current policies at their September meeting. We’ve even heard from direct sources saying that ‘investors won’t be disappointed’ by the September review. So, even if the Bank of Japan doesn’t pose any changes, the results of this review could be a significant driver if the BoJ merely says that they have more ammunition that they’re willing to deploy in the coming months.

As we near this upcoming BoJ meeting, USD/JPY is getting primed to move, digging deeper into a shorter-term symmetrical wedge pattern, near the resistance portion of a year-long trend-channel. For traders looking to try to anticipate more monetary action out of the Bank of Japan, the longer-term support build around the ¥100.00-level could be extremely enticing.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

S&P 500 (SPX500)

The median expectation for the upcoming Federal Reserve announcement appears to be for a ‘hawkish hold’ type-of-scenario. Numerous Fed officials have warned of impending rate hikes in the past few weeks, but economic data remains rather non-convincing and other Fed members are continuing to take on a dovish tilt towards future policy moves. This would be very similar to last September’s Fed meeting, in which the bank had talked up the prospect of rate hikes for months only to capitulate as Chinese risk began to seep through global markets.

It was the reaction around that event that should be most noteworthy to traders, as this meeting produced a brutal reversal in the risk trade: With excitement of no rate hike first driving prices lower, only for selling to take over shortly thereafter as it becomes obvious that the Fed is looking to hike very soon. On the chart below, we go over the context around last September’s hawkish-hold from the Federal Reserve, as shown in the S&P 500.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

Right now we have a similar situation developing in the S&P 500 as we sit just two short days away from that next FOMC announcement. The July FOMC meeting saw the Federal Reserve make a slightly hawkish tweak to their statement; and in the following month we heard quite a bit more hawkish Fed commentary at the Jackson Hole Economic Symposium, and this brought additional strength into the US Dollar while risk assets like stocks faced weakness.

On the chart below, we’re looking at the hourly setup in the S&P 500, which looks very similar, albeit abridged compared to what we saw last year.

Beware the BoJ as the Fed Looks to Avoid a September Repeat

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for

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