ALERT: Bank of Japan Rocks Global Markets Overnight
April 28, 2016
By: Solon C. Stephanou
For those of you that may have gone to bed early last night, there was a stunning development overnight. It didn’t involve anything that happened, but rather what didn’t happen. At 11:00 PM last night, the Bank of Japan released its Monetary Policy Statement. I have been including the BoJ statement as an important event in the Market Recaps as something to keep an eye on as it has the potential to move the markets, and it did.
For those that have been following the Forex Markets and Central Banking activity, you already know that the Bank of Japan is one of the more aggressive central banks and that it does not hesitate to take drastic measures to spur economic activity. Whether it has been announcing massive levels of Quantitative Easing (printing money) or being the first central bank to introduce Negative Interest Rate Policy (NIRP), the BoJ has not been shy or timid in trying to “save” the Japanese economy. That is why when the announcement came out last night that it was not going to do anything to spur economic activity, it instantly rocked the markets. The immediate reactions are as follows:
There was a total of a 375 PIP movement of the JPY against the USD.
The Dollar Index broke its Critical Support at 94 and is retesting as of the morning open.
The Nikkei futures market (/NKD) lost a total of 5.64%.
The S&P futures instantly clipped 20 points, eclipsing the trading range of the past few days, including the reaction to the FOMC Statement.
With the 2% inflation target of the Bank of Japan becoming increasingly out of reach after inflation rates turned negative back in March, analysts and economists alike are beginning to believe that the central bank is running out of options. Some believe that this was a political decision meant to force the Japanese government into additional fiscal stimulus. Others believe that this may just be the BoJ’s “wait and see” approach following NIRP as it would take 6 months to a year to judge the effects that the policy has had.
Either way, as traders, it is your job to be mindful of such events and the effects that it would have on your portfolios. The global markets are all correlated and interconnected, and monetary policy in Japan can have a significant impact on not just your Forex accounts, but your stock portfolios as well. So make sure that you position size properly and always have protection on you portfolio.
Make sure that you’re the one having the last laugh.
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That seems pretty dramatic, but being a novice in the financial markets, I have no idea what the implications are or what would be an appropriate response. Is this the first sign of the apocalypses? Should I short everything?
Great update, Solon! I am sure folks were asking the same thing I was this morning: what caused every currency, and most markets to have a big move? Oddly, BOJ didn’t say anything different than FOMC, they’re doing nothing up or down, just same-o, same-o. But the expectations were different going into BOJ announcement, investors had already planned to see a step up in easing policy (more negative interest rates?) Interesting, to say the least.
Haha, Peter. Don’t go overboard. You are right that the move itself was dramatic. If you offered a guy like Matt Justice a trade where if he was triggered in, he would profit about 300 PIP on the initial move and it would run a little further, he’d take it in a heartbeat (that’s a 150% return on your capital in a Forex account). It should serve as a couple of lessons.
1. All the markets are correlated together.
2. There is an almost infinite number of trading opportunities in the market. If you traded a standard lot ($2,000) on the news based trade (which Matt teaches and has videos on), you would have made a profit of $3,000. You could have also made money on the US futures as well as the Japanese Futures. The possibilities to make money are really endless.
3. It’s also good to be knowledgeable about what is going on in the international markets, global economics, and have more context in that regard. If you understand it, Great! If not, don’t worry about it and just focus on the basics. Some of the economic concepts are just cool to know later on as it will help give you that deep understanding of the markets.
Thanks Solon! With the breaking of the 94 level on the USD. Do you anticipate the dollar continuing down on this news? I can’t trade futures or forex yet but can trade UUP. Looking at shorting it if holds its move down at the end of the day. What is your option?
Kody, I don’t give trade recommendations. That’s way too dangerous and risky with not only the legal repercussions but also I would never tell anyone what they should do with their money. I’m just here to help provide extra education and another perspective with which to compare with yours.
If you asked me what I see on the Dollar Index.
1. It’s Bearish.
2. It’s kind of forming a double top (M) pattern on the 3 year/Weekly candlestick chart. As well as additional M’s within each top.
3. Broke key support at 94.
4. The 8/17/9 MACD on the weekly chart crossed under on 3/7-3/14 and has already run a good 3-4% of its total value.
5. The 50 day MA crossed under the 200 day MA (daily chart) on 3/30/16.
Now whether you think that you’ve already missed much of the move or whether this is headed for a historic breakdown (as it did on the run up) is up to you. Just make sure you either keep a tight stop, position size small, or both in order to control risk.
That is what I was looking for. I understand the trade recommendation, sorry for putting it that way. Appreciate your technical evaluation of the Dollar index. Thanks Solon! I’m enjoying your market recaps!
Much ado about nothing. Thanks for the insightful analysis, Solon
I was up last night and saw the drop of 20 points in the /ES. I overlooked BoJ news yesterday on the Economic Calendar while going through my daily routine. I will NEVER do that again.
The indices really fell at the end of the trading today, lead by RUT going south and then everything followed! Are we going to cover this action in a Recap today? I am looking forward to it.