USD/JPY: The short half-life of the BOJ’s radioactive negative interest rate decision
Matt Weller, CFA, CMT February 3, 2016 10:50 AM
<p>According to Wikipedia, Hydrogen-7 is the radioactive isotope with the shortest half-life at about 21 yoctoseconds (10<sup>-24</sup> seconds). Of course, nothing in financial markets moves <i>quite</i> that fast (despite the best efforts of some algorithms), but the half-life of <a href="http://www.forex.com/post?Pa=5b9e00f7-1868-4c89-a976-4ce50f9d8e4c&SDN=a40774a1-acbf-4dce-a62c-da90afa2c02e#x2">Friday’s surprise BOJ interest rate cut</a> has been shockingingly short, even by 2016’s fast-moving market’s standards.</p>
According to Wikipedia, Hydrogen-7 is the radioactive isotope with the shortest half-life at about 21 yoctoseconds (10-24 seconds). Of course, nothing in financial markets moves quite that fast (despite the best efforts of some algorithms), but the half-life of Friday’s surprise BOJ interest rate cut has been shockingingly short, even by 2016’s fast-moving market’s standards.
While the decision to cross the "negative interest rate rubicon" represents a major shift from the BOJ, traders are starting to realize that the actual economic impact of the interest rate cut will be minimal. As we noted on Friday, "logistically, the impact of the change in policy will be relatively limited, as it will "only" apply to about ¥10-30T of reserves (the vast bulk of reserves will continue to earn 0.1%)…"
The BOJ may eventually opt to expand the holdings that the rate applies to (or cut rates further), but for today, the central bank’s decision is being completely overwhelmed by the massive wave of risk aversion enveloping global markets this week. In other words, despite (or in some ways because of) the now-negative interest rates in Japan, traders still view the yen as a major safe-haven currency. Therefore, the near-term direction of the yen will depend on market sentiment (read: price action in other major markets like equities and commodities) as much as traditional economic data out of the US and Japan.
Technical view: USD/JPY
On a technical basis, the longer-term view for USD/JPY remains unchanged: the pair remains locked within the 900-pip range from 116.00 up to 125.00 that has contained rates since November 2014. From a fundamental perspective, we continue to believe that the BOJ will take actions to defend the bottom of this range, as the last thing the Japanese economy needs is a strengthening yen, but the near-term momentum remains strongly in favor of the bears for now.
With the MACD rolling over below the "0" level and the RSI indicator topping out before reaching "overbought" territory, more short-term weakness toward the 116-117 zone in USD/JPY is possible if global equities remain on the back foot.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.