Monday, November 3, 2014
The surprising announcement of additional monetary stimulus measures by the Bank of Japan on Friday not only sent the value of the Yen plummeting, but also sparked a huge rally in the Japanese equity markets. December Nikkei 225 index futures soared by nearly 8% to highs not seen since 2007, as traders believe that a weaker Yen will help corporate profits - especially for the nation's exporters. In addition, the Government Pension Investment Fund announced that it increased its holdings of both Japanese and other foreign stocks in order to boost investment returns, which resulted in higher equity markets across the globe on Friday.
Currency traders had a "scary" Halloween as the Bank of Japan (BOJ) surprised analysts by announcing an increase in monetary stimulus. The result was a 3% plunge in the value of the Japanese Yen vs. the U.S. Dollar (USD/JPY), which within the scheme of currency fluctuations is a huge one-day price move. The BOJ announced it would expand the monetary base by 80 trillion Yen per year and would purchase both Japanese exchange traded funds (ETF's) and real estate investment trusts (REIT's). The BOJ's goal in adding the additional monetary stimulus is to help the nation's exporters, who will benefit from a cheaper Yen, as well as to attempt to stimulate inflationary pressures, as the targeted rate of 2% has yet to be reached. The reaction of the market to the BOJ stimulus may have been exaggerated due to catching traders off-guard, as few market participants were expecting any action from the BOJ. So while the BOJ is in an accommodative mode, the Federal Reserve may become a bit more hawkish in reining-in the accommodative monetary policies in place since 2008. This trend could spur further weakness in the value of the Yen vs. the USD, especially once the Fed finally raises the Fund Funds Rate.
Looking at the weekly continuation chart for Japanese Yen futures, we notice prices falling to multi-year lows as key support at 0.9000 failed to hold. While it appears that the market has become oversold, especially with the 14-week RSI moving below 30. There appears to be little in the way of chart support until the 0.8550 price level, with major support not found until the 0.8150 price level. Taking a long-term look at the market shows that the recent price decline has not yet even reached the 50% Fibonacci retracement level if we start at the major lows made back in 1976! While support is seen at 0.8550, the next resistance level is found just above the 38.2% Fibonacci retracement level near 0.9510.
Mike Zarembski, Senior Commodity Analyst