Forex Today - The BoJ goes forward guidance on steroids, USD waiting on the Fed

Market Analysis /
Greg McKenna / 01 Aug 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

And, for a deeper dive into more currencies and the charts please see my daily markets video.


The USD is a little stronger in index terms this morning sitting at 94.49. That's mostly on the back of the post-BoJ surge in USDJPY (and a little risk appetite perhaps) – it’s at 111.87, up 0.7%. The Euro is largely flat at 1.1690, as is the Pound at 1.3120. Both are off their highs for the night though of 1.1745 and 1.3172 respectively. So, the USD hasn’t had a bad night.

On the commodity bloc the rally in copper and base metals more broadly, the lift in basic materials stocks, and a generally more positive tone has helped the Aussie dollar hold yesterday’s post-building approvals gains. AUDUSD is at 0.7430, off a high of 0.7440. Kiwi is 0.6810 after mildly weaker than forecast employment data this morning. It's down 0.2%. USDCAD has fallen 0.20% after the Canadian economy recorded stronger GDP growth than expected in May data released overnight showed. USDCAD is at 1.3003.


Bear with me folks, it's high horse time.

What exactly was QQE – the BoJ’s plan to buy unlimited amounts of 10’s to keep them anchored at 0% - if it wasn’t EXPLICIT forward guidance? AM I wrong?

So, as I tweeted yesterday afternoon, "I read the #BoJ's new "Strengthening the Framework for Continuous Powerful Monetary Easing" doc & get a real sense they're looking for the exit...eventually but confused…"Forward guidance" plus letting 10's move "upward & downwards to some extent" plus downgraded GDP :S”.

Indeed they are confused after years of missing their inflation target but materially impacting the market transmission mechanisms of stocks, bonds, and currency levels and rates.

But I do sense a move toward the exit. That’s something Shuli Ren said in a Bloomberg article yesterday titled, “The Bank of Japan Has Found Some Cover for Tapering”. Ren said, “When a central bank feels the need to tell the world that its monetary policy is “continuous” and “powerful,” you know investors will conclude that it’s neither”.

I couldn’t agree more, though many have said this is QE to infinity. So I might have the wrong end of the stick on this.

Ren focuses on the tweaks and is spot on saying (my bolding), “what’s “around zero percent” anyway? Is 0.2 percent around zero? How about 0.49 percent? If U.S. rates rise sharply, this is Kuroda’s easy way to be in sync with the rest of the world…The 10-year government yield dropped 5 basis points on Tuesday, the most since June 2016, to 0.05 percent, as earlier media reports of a major policy shakeup proved incorrect. Don’t be surprised, however, if Japan’s bond yields soar with the U.S., because now the BOJ has the policy flexibility to let them”.

That didn’t matter to Yen buyers though. Because the bet is that this is QE to infinity with the Yen losing 0.6% as USDJPY rose to 111.73 this morning while the USD was flat against the Euro and Pound. Maybe some of that was risk appetite because the Swissie underperformed too. But the important thing is that USDJPY is trying to climb back above the 3year trend line. Let’s see where it ends the week after the Fed and non-farms.   

Click on me, I'll expand
Click on me, I'll expand

Elsewhere the strength of US data and weakness of Euro GDP did little other than constrain the Euro rally. 

EU GDP decelerated to 0.3% in Q2. Zero point three percent – awful. But inflation was reported as 2.1% for July so even though growth is not strong the ECB will be on track to end QE this year and may even start thinking about hiking earlier than is currently forecast. That will help the Euro a little.

Click on me, I'll expand
Click on me, I'll expand

Indeed you can in this chart of the EU 2yr govie forward 2 years that if this relationship has any bearing on the EURUSD direction Euro could rally. Of course, the market is not short Euro like it is many other pairs so the impetus for a drive higher as shorts cover is not as strong. But if Euro can best 1.1730/50 resistance it can rally. 

Click on me, I'll expand
Click on me, I'll expand

Bring on the FED


On the day today we get New Zealand employment and labour costs this morning and then it being the start of the month we get the raft of manufacturing PMI’s across the globe. Here in Australia we get the AiGroup’s version. Also, out is an RBI decision on interest rates. Tonight, it’s the ISM in the US I’ll be watching closely along with where Europe is at and then tomorrow morning at 4am my time the Fed will do nothing the market is betting. 

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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