Yen Pressure Builds As BoJ Rate Decision And A Flood Of Data Approaches

BoJ Rate Decision (n/a GMT)
Retail Trade s.a. (MoM) (MAR) (23:50 GMT)
Expected: 0.50%
Expected: -0.6%
Previous: 0.50%
Previous: -0.8%

How Will The Markets React?

All the major Japanese markets have been constricted to tight ranges since the beginning of the month, suggesting there is something considerable on the horizon keeping traders in place. A quick scan of any respectable economic calendar would clearly reveal that this ‘something’ is most likely the accumulated event risk on Thursday evening (Friday morning in Japan). A simple count finds eight specific events that are considered top market-moving indicators in their own right. However, since most of these reports are scheduled within 20 minutes of each other, the market will have to quickly sift through all the information to garner the true gem that will crowd everything else out. To handicap the data flow, we need to consider timing and individual surprises. Since any of the reports can print well outside the safe bounds of economists’ official consensuses, it is best to consider everything with similar prints. Things begin at 23:30 GMT with reports on employment, inflation and domestic spending. Taking into account past market reactions and the unique conditions this time around, both the jobless rate and national and Tokyo consumer price indices will be overlooked since monetary policy has shifted to hikes despite the lack of support both of these numbers have supplied. On that same note, household spending is integral to future rate hikes, since it is considered the disconnect between wage growth and sustainable inflation. Twenty minutes later, industrial production and retail sales hit the wires. Once again consumer spending trumps. When all this data has passed, the BoJ rate decision - and more importantly their semi annual economic outlook report - will control the fate of the markets. The central bank is not expected to move; but the policy report (with its firm release time) will help to clarify the policy groups’ direction for the future. If that wasn’t enough, Golden Week is next week, and the RBNZ’s rate hike has increased pressure on the carry trade.
Bonds - 10- Year Japanese Government Bond Futures
The active JGB futures contract has ranged back and forth between 134.25 and 133.41 for over a month. During this period, a number of macro releases have thrown their weight around, and the carry trade currents have surged back and forth. In spite of all this, government bond traders have refused to take the benchmark vehicle on a breakout. While congestion-based conditions may remain well into the future, most traders will take account of the coming data storm Thursday evening. A number of top-tier indicators will flood the market with actionable event risk, though it will most likely be the Bank of Japan that has the honor of pushing bonds. Few market participants expect a rate hike; but the semi-annual economic report can reveal whether one will be pursued in the near future.

The Japanese Yen looks ready to break out, as USDJPY trade has been particularly subdued ahead of the release of a slew of Japanese economic data. In fact, CPI, industrial production, retail trade, housing starts, AND the Bank of Japan’s policy decision are all scheduled for the same night. However, three events present the most significant event risk for USDJPY trade: inflation, consumption, and the central bank decision. Consumer prices are anticipated to show the economy continues to slip into deflation, while the retail figures are forecasted to show sluggish spending by households. These expectations bode incredibly ill for a potential rate hike by the Bank of Japan, as the central bank’s desire to continue normalizing rates should be cooled by the prospect of even dimmer expansion and contracting prices. On the other hand, surprise jumps in the economic indicators ahead of the monetary policy decision could leave markets steady and create even more violent USDJPY price action on the rate announcement.
Regardless of the actual results, we look to resistance at 119.00 and support at 118.00. First, if we see USDJPY break resistance, the pair could make a stronger ascent through 120.00 to test the February highs. On the other hand, should markets perceive a more hawkish stance by the Bank of Japan, USDJPY could plummet below support to target the 117.00 level - possibly pointing to a weakened interest in the carry trade as a whole.

Equities - Nikkei 225 Index
Japanese stocks dropped to three week lows after economic reports in the US were mixed, renewing concern slower growth in the world’s largest economy will curb demand for products from major exporters. The Nikkei 225 Stock Average plunged 1.2 percent to 17,236.16 during the Tokyo session, led by Toyota, which became the world’s largest automaker, fell 1.9 percent to 7,230. Meanwhile, Sony Corp., maker of the PlayStation 3 game console, fell 1.4 percent to 6,400.
Will Japanese equities continue their descent? With an abundance of data on tap, the Nikkei 225 could actually make a break higher. While CPI is expected to show the economy is still easing towards deflation and retail sales are forecasted to remain sluggish, the Bank of Japan is predicted to leave rates steady at 0.50 percent - perhaps the key event for traders looking for assurance that the central bank won’t try to force further rate normalization. On the other hand, tepid consumption and potential deflation could keep equity sentiment dismal and lead the Nikkei 225 towards support near 17,000.