Japan has taken revenge on everyone

This week is expected to be quite nervous because of the upcoming NFP: the main thing of this publication is the growth of salaries

The market did not expect such active actions from the Japanese regulator. Already cheap, Japanese shares have fallen almost by 17% without a hope for recovery. ECB's active hints at its readiness to weaken the monetary policy as soon as in March led to the growth of pressure on yen and euro and the highest devaluation of franc since the previous summer. The decrease of the Bank of Japan's rate was the main surprise of the last week, moreover, not very long before that Kuroda reassured the world in the consistency of the financial policy. The decision was obviously made under Abe's personal political pressure with a minimum vote margin. The nervous fall of yen by 300 points was caused by a huge volume of hedge fund short positions in USD/JPY (maximum since 2012). The reactions would hardly have been so strong had it not been for those speculators.

In reality, the Japanese rate has three tiers:

  1. The rate for the basic balance of Japanese banks remains the same (+0.1%), i.e. it is for that existing reserve levels (about USD 2.5 trn) that were formed in the course of QE program in 2015.
  2. Zero interest rate will be applied to the mandatory reserves of the banks.
  3. The negative interest rate (-0.1%) will be effective as based on the banks' excess reserves that are planned to be accrued to banks in the course of the continuation of the QE program.

The BoJ's statement showed the threats of possible further decrease of the rate paid on excess reserves, the change of QE amount and composition. The risks for the economy were shifted towards decrease: inflation forecast for 2016-17 financial year has been reduced to 0.8%, it is expected that the inflation will reach 2% in the first half of 2017. Theoretically, in case of further expansion of the QE program, the negative interest rate will contribute to the outflow of capital from Japan. Now, the speculators will close short positions actively, and will sell USD/JPY in case of growth.

The FRS accompanying statement looks too dovish; however, there is no sense to concentrate on its positive aspects since FRS has nothing to boast of except the statistics on the continuing growth of the labor market. There is an impression that the Committee members endorsed their failure to understand the events that take place, the absence of confidence in the further developments, and, in general, they doubt the propriety of the December rate increase. Rates, obviously, will not be increased at the meeting on March 16; however, we can assume that the FRS Protocol on February 17 will be in favor of the decline of the US dollar exchange rate.

The following can be mentioned from the other news:

  1. American hedge funds have changed their policy dramatically and place their stakes on the growth of oil prices judging by open positions on the New York Mercantile Exchange. That can be considered as the first response to the active negotiations held in the oil circles, in particular, visits of the Chinese Prime Minister to Iran and Saudi Arabia and his hard offer to pay for possible oil supplies exceptionally in yuans.
  2. Some well-known people in the industry of hedge funds (Soros, Bass, Ackman, Druckenmiller, Tepper, Schreiber, Einhorn, Scogging, Carlyle) make significant bets against the Chinese currency - large funds sell a share of their investments in shares, bonds, and assets, which may lead to weakening of Asian currencies, including yuan and Hon Kong dollar. Investments have been made in the assets that will be profitable in case yuan and Hong Kong dollar are devalued in the period of three years; billions of dollars, including loans are at stake. The real devaluation of yuan is only beginning to take place, especially if FRS further continues its rate decrease.
  3. Switzerland has been preparing for banking reforms - the preparation for the referendum to end the banking principal of fractional reserves, on which the whole modern financial system is held, and which became the cause of all XX century economic crises is underway. The loss of banks' right to invest a part of their deposits on the free market or distribute them in the form of loans must legally fix the logical ratio of investments and reserves at 1:1 and in no other way.

This week is expected to be quite nervous because of the upcoming NFP: the main thing of this publication is the growth of salaries; in case of 0.3% growth as predicted or above, we should expect the growth of US dollar on the second spike since the growth of salaries is the secondary sign of inflation growth, which will confirm the statement made by FRS members with regard to rate increase. American ISM manufacturing and services publication turned out to be above that expected, we have to wait for the publication of ADR. In order to have the general assessment of ISM indexes in January, we will need to use the revised data for December. Draghi had no reasons for optimism, that is why he used all his efforts to sink euro.

Euro: mid-term neutral zone: 1.0970-1.1060. Trade above/below is still blocked by strong intraday resistance in area 1.0890-1.0930, not allowing to approach key level 1.1000. Closing above 1.1050 increases the likelihood of tackling 1.1000-1.1200 range. In its turn, the penetration of 1.1200 opens the way up. The intraday support is located in range 1.0804-1.0773. Below, market makers formed the strongest Put range 1.0800-1.0700, which is very difficult to penetrate; however, if it happens, the fall to 1.0550 will not be stopped. The general direction is still neutral.

Yen: closest areas of resistance 121.34/121.79/122.52; closest areas of support: 120.61/120.02/119.45. Below that, there is a serious protection made of Call options. We should speak of another decline only in case of a downward penetration to 118.34 level. So far, the sentiment has been bullish.

Author: Alexander Ward,
ForexChief Currency strategist