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FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

2017-05-24 13:15:00
James Stanley, Strategist
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Talking Points:

- Today’s economic calendar has two drivers of relevance with the Bank of Canada rate decision (10 AM ET) along with the release of FOMC minutes from the meeting held earlier this month.

- Last week saw a sell-off in USD/JPY, bringing questions to the sustainability of the pair’s bullish trend. But over the last couple of trading days, USD/JPY has been putting in bullish tendencies again, and we investigate that below.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our IG Client Sentiment Indicator.

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FOMC Meeting Minutes (from May 2-3 meeting) Released Today at 2PM ET

The big item for markets today will likely be the release of FOMC minutes at 2PM ET. Given the bank’s stance at their rate decision earlier in the month, the general expectation is that the record from that meeting will indicate that the Fed is close to hiking in June. The bigger question will be around the Fed’s $4 Trillion-plus balance sheet, and whether or not there were any discussions as to how that might be handled, if it all, in the second half of this 2017. Also of interest would be any discussion or commentary around a third rate hike in 2017.

For its part, the U.S. Dollar has spent most of 2017 selling-off. The topside burst after the Presidential election drove the Greenback to fresh 14-year highs; but shortly after the turn of the New Year, price action turned and DXY has spent much of 2017 trending lower in a down-ward sloping channel. Those declines have hastened of recent, as DXY has broken-below this channel, indicating that the market may be a bit oversold at the moment.

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

Chart prepared by James Stanley

Bank of Canada Rate Decision at 10:00 AM ET (Link for Rate Announcement)

Also on the calendar for today is a rate decision out of the Bank of Canada. The general expectation here appears to be centered on another dovish outlay from Stephon Poloz of the BoC. As we near the rate decision, USD/CAD is sitting atop a very interesting zone of support around 1.3450. This area includes two Fibonacci levels of relevance, and price action caught a support bounce on this zone when testing it yesterday.

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

Chart prepared by James Stanley

Is the USD/JPY bullish trend on the way back?

In yesterday’s article, we looked at the current backdrop for the Japanese Yen. After the currency kick-started another wave of Yen-weakness, driven largely on the presumption that the Bank of Japan would remain one of the looser Central Banks as Europe and the ECB (and Germany) looked at tighter policy options, or at the very least ‘less loose’ policy options for the European economy. As Mario Draghi wrestles with market forces attempting to get in front of what appears to be an inevitable tapering of QE purchases, the Yen, and Japan, appear to be prime areas to look at for a ‘funding currency’.

But then last week Governor Kuroda of the BoJ offered the off-handed comment that he didn’t feel that the BoJ would have too much trouble exiting from their stimulus outlay. This speaks to the taper tantrum in the United States (represented by a Federal Reserve that’s still yet to address their balance sheet), along with what’s being seen in the Euro at the moment as the ECB and Mario Draghi try to allay concerns of tapering which are, apparently, falling on uninterested ears as the Euro just keeps trending-higher.

This sparked a quick spate of strength in the Japanese Yen, as a Central Banker that says ‘we can exit stimulus without too much trouble’ is obviously a Central Banker thinking about exiting stimulus; and this flies directly in the face of everything that the Bank of Japan has said up to this point, continually assuring markets that they’re going to stay loose and passive until that 2% core inflation target is well in-sight.

That quick spate of strength in the Yen helped to bring a pullback in that bullish USD/JPY move; but for much of the trading day on Wednesday of last week, shortly after Governor Kuroda’s comments, it felt like a straight-up sell-off rather than a pullback or retracement move.

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

Chart prepared by James Stanley

On the charts below, we can get a bit more granular with this recent bullish move. Intra-day support is showing on a trend-line projection that intersects with this confluent zone of support/resistance running from 111.61-112.40.

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

Chart prepared by James Stanley

Within this confluent zone of support, we have the 38.2% retracement of the ‘election move’ in USD/JPY at ¥111.96, taking the low of 101.96 from the night of the election up to the high set in December, right around the Fed rate hike. After buyers bid prices back into this zone of support/resistance, price action found a brief iteration of resistance on the trend-line projection, but quickly turned that resistance into support. Sellers showed back-up around 111.96, giving us another short-term higher-high to work with while this trend-line projection may be helping us to find the ‘higher low’ in the pair.

FOMC Minutes, BoC Rates and USD/JPY Bulls Re-Emerge

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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