FX Update: BoJ backed into a corner, tweak or no tweak.

Today's Saxo Market Call podcast.
Today's Market Quick Take from the Saxo Strategy Team

See Saxo’s Charu Chanana for an excellent run-down of the Bank of Japan meeting overnight as a starter. As Charu points out, we have a significant volatility event on our hands, with the chief uncertainty whether the BoJ capitulates now to a more significant shift in a policy, merely tweaks once again, or only guides for a further cautious adjustment in upcoming meetings. The only compelling reason for the Bank of Japan to go with the more dramatic option is to avoid continuing its rear-guard actions to enforce the top of the yield band at 0.50% for 10-year JGB’s. The BoJ’s holdings have ballooned a further few percent in the short space of a few months – ironically a massive QE liquidity boost for asset markets at a time when we are discussing impending tightening. So one angle on this is that, if the Bank of Japan sufficiently widens the band or steps away from capping longer yields entirely, this effective QE will come to a screeching halt. Not good for risky assets, but likely not bad for the US dollar as the greenback should always perform as a relative safe harbor in troubled markets. And here we’re not talking in USDJPY terms, but in other USD pairs (USDCAD, AUDUSD, GBPUSD, etc..)

So it may be important to consider that this BoJ meeting tonight is far more a JPY cross risk than a specifically USDPY risk. Other JPY crosses, like AUDJPY, may not have sufficiently adjusted to the implications of significant future tightening of yield spreads and 10-year Australian yields are also trading near recent lows, just as US longer yields are.

Chart: AUDJPY
As noted above, watching JPY crosses besides USDJPY as a measure of the JPY reaction to whatever the Bank of Japan delivers tonight. For AUDJPY, the important pivot area comes in around 87.50, with a break possibly leading to a test toward 81.00 (the 200-week moving average) or even 78.50 eventually on a huge reset of the JPY across the board. That fits with a USDJPY reset toward 115.00 (putting AUDUSD at around 0.6825) or with AUDUSD far lower if the USDJPY reset is far more modest, as massive volatility across markets might see the US dollar finding a solid bid in other USD pairs as a safe haven.